The best personal finance inflation hedges

Inflation was already a stone’s throw away from 8% before war broke out between two countries that account for a large share of the world’s energy and agricultural commodities.

I would not be surprised to see this number as high as 10% in the coming months.

Working in an industry that is obsessed with markets, I find that most of the questions people now ask about inflation come from their portfolio perspective.

Should I buy basic products?

How about TIPS?

Is it too late to buy Energy shares?

Have you seen the returns of the Series I Savings Bonds?!

How do I protect myself against inflation?

The way I see it, the time to prepare for inflation is ahead of time, not while it’s happening.

Between 2009 and 2020, the US stock market rose more than 13% per year above the rate of inflation. If he’s been a long-term investor, he was hedging against high inflation before it hit.

Regardless of how you’re managing your investments to account for higher prices, there are other ways to protect against inflation beyond your portfolio.

Here are some ideas for the best personal finance inflation hedges:

A Costco membership. Are prices going up at Costco just like other grocery stores? Of course. But buying in bulk is a good way to protect yourself against further price increases should they occur.1

Your Costco membership also comes with slightly lower gas prices, which at least pays for your annual membership and then some.

Plus, you can still get a Costco hot dog and soda for $1.50, the same price it was back in 1985 (I’m only half kidding here).

A 30-year fixed-rate mortgage. The main reason to invest in the first place is to improve your standard of living. If you were to just bury all your money in your backyard, it would eventually lose its value over time:

You can think of debt in the opposite way. With debt, your liability is what loses value over time and that’s a good thing. This is what makes a low interest rate mortgage one of the best inflation hedges on the planet.

The median sale price of an existing home in the United States is now around $350,000. Assuming a 10% down payment, using the 30-year average mortgage rate over the past 5 years of 3.7%, you’ll get a monthly payment of approximately $1,450.

With 8% inflation over the past year, that would mean someone’s $1,450 monthly payment from last year would now technically be worth more than $1,335. I didn’t calculate the after-tax cost of mortgage debt here, but you get the idea.

The combination of rising home prices and low mortgage rates has made housing probably the best hedge against inflation for the vast majority of Americans in recent years.

Holding on to fixed-rate debt also means you’re not subject to inflationary pressures on rents.

Unfortunately, if you don’t own a home, you’re taking it overboard. According to Apartment listyear over year rental growth was nearly 18% at last reading.

substitution capacity. Last week I found myself in one of the happiest places in the world on a Friday afternoon: the liquor store.two I like to do my channel checks on trips like this, so I asked the owner how inflation is affecting his business.

He told me he’s seeing higher prices across the board, but what surprised him the most was a new gas surcharge on his ice delivery. He said he was charged $60 for a $30 ice delivery.

I guess we’ll see a lot more of this in the coming weeks and months. Uber just announced that they will add a $0.45 to $0.55 fee per ride, while Uber Eats deliveries will include a $0.35 to $0.45 surcharge.

I know we’ve all gotten used to paying for convenience, but with higher prices, some people will have to make different decisions about how to allocate their budgets.

Maybe that $20 DoorDash surcharge isn’t worth it anymore. Maybe you’re going to pick up the pizza instead of paying for delivery. Maybe sacrifice 1 or 2 nights of eating out to offset higher utility bills.

For people on a tight budget, there will probably have to be some trade-offs.

Avoid lifestyle creep. Inflation tends to hit households at the lower end of the income scale harder because they don’t have as much room in their budgets when the prices of basic necessities rise.

But the group that is easiest to take advantage of with higher prices are those with higher incomes.

Last month I wrote about Chanel raising the price of their handbags from $5,200 in 2019 to $8,200 today. These bags are pointing to items that rich people are willing to pay for.

Avoiding the siren song of luxury items is a simple way to prevent your personal inflation rate from spiraling out of control.

The ability to negotiate higher wages. This option isn’t talked about enough in personal finance circles, but this is probably the best environment for workers to ask for a raise.

There are many job opportunities, there is a shortage of workers, and we are still in a world with demand suppressed by the pandemic. If you provide real value to your employer, now is the time to ask for more money.

And if they don’t value your work, there are plenty of options elsewhere these days. A recent study of research bank surveyed people who quit their jobs in 2021. Most were looking for more pay or flexibility (the ability to work from home is another decent hedge against higher energy prices):

At least half of these workers say that compared to their last job, they now earn more money (56%), have more opportunities for advancement (53%), have an easier time reconciling work and family responsibilities (53%), and they have more flexibility to choose the work schedule (50%).

Saving money is always helpful, but when prices go up, it becomes that much harder for many households to save money.

Making more money is one of those things that no one teaches you how to do, but it’s probably your best bet for improving your standard of living in the long run.

I know that putting inflation hedges on your portfolio is the most attractive option, but you have more control over your personal finances than the markets when it comes to fighting inflation.

Other readings:
Why housing is a good hedge against inflation

1This is when that extra freezer in the garage comes in handy.

twoSo much excitement in the air about weekend plans.


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