If there’s one thing that scares me about my money situation, it’s inflation.
In one of my most popular posts where I broke down how much money you need to never work again, I barely mentioned inflation. That’s because when I wrote it just a couple of years ago, inflation wasn’t a huge deal. Things can change quickly.
For most of my lifetime, inflation was a slow, steady process. Every year prices would rise about 1-2% on average. This meant that a yearly 3% raise at work kept you out ahead. It also meant that retirement planning was pretty easy; If you expected your investment to earn 8% per year and inflation to be 2%, you could just run your calculations as if you were going to be earning 6% on your investments. Not a huge deal.
The Destructive Power of Inflation
Everything changes completely when the inflation rate jumps up to something in the range of 6-8% like it has been since the middle of 2021 (when they said inflation would be temporary). Now the math goes: You expect your investment to return 8% per year but you need to discount that 6-8% for inflation. Good luck with that.
And of course, where most people really feel inflation isn’t when planning for financial independence, it’s when they are living their everyday lives. You notice it when the combo meal at McDonald’s that you thought was “around five bucks” actually clocks in at more than $10. You notice it when the grocery bill comes up way higher than you expected. It hits you at the end of the month with a credit card balance that seems too high and a bank account balance that seems too low.
This is where inflation can really destroy your financial situation. You were saving, but the surplus between what you make and what you spend gets slowly eaten by higher prices. Or worse, you were breaking even and now you’re taking on debt.
We’ve been dealt a bad hand, but complaining about it won’t do us any good. We have to figure out how to make the best of a bad situation and mitigate the financial disaster that is inflation. It won’t be easy, but if you don’t beat inflation, inflation will beat you.
There are two ways to fight back against inflation: Playing offense (earning more) and playing defense (spending less). Both are important, but let’s start with playing defense.
Imagine for a second that you’re playing against Michael Jordan and the Bulls in the NBA finals. I’m guessing that leading up to the first game, a lot of your preparation is going to be devoted to how to stop Michael Jordan and very little time is going to spend talking about how to defend Jason Caffey. Why? Because Michael Jordan was the Bulls’ top scorer and best player.
This is an example of what’s called The Pareto Principle. This is the idea that the vast majority of outputs are caused by a relatively small number of inputs. If you stop Michael Jordan, you cut the Bulls’ off from the source of a third of their points.
The same principles apply to your spending. If you’re like most people, you spend more on housing than anything else. For most people, housing is about a third of their budget just like Michael Jordan was about a third of the Bulls’ offense.
So when it comes to playing defense, the first place you should look is your housing situation.
Unfortunately, there are no quick, easy wins in the arena of housing. Finding a new place to live is a pain. Moving is a pain. There are large transaction costs associated with buying and selling houses.
What’s more, this is a bad time to be buying a house. House prices are high (even if they’ve dipped a bit recently). Mortgage rates have gone through the roof.
So I feel bad giving this next piece of advice now, because we’re at a time when it’s hard to put into practice. But the situation we’re in illustrates precisely why it is good advice. So here it goes: One way to protect yourself from inflation is to find a great deal on a house and lock your housing payment in.
There are three main factors to getting a great monthly payment:
- Getting the house at a low price
- Getting a mortgage at a low interest rate
- Living below your means
Let’s break those down:
Getting the house at a low price
This one is tough given the massive increase in home prices over the past decade. The best you can hope for is a good price relative to what else is on the market. I bought my house at a time when I could barely afford most houses for sale in town, so it took me nearly a year to find a deal I could make work.
But if you’re patient you can save real money here.
Getting the mortgage at a low interest rate
Again, this one is tough because at the time I’m writing this (March of 2023), interest rates are sky-high.
But your interest rate isn’t something that is completely out of your control. If you build up a good credit score, you can usually get more favorable credit terms, which often includes a lower interest rate than average.
Living below your means
This isn’t the one you wanted to hear, but of the three it’s probably the most immediately actionable. And it can apply to both buying and renting.
If you’re renting a nice apartment with tons of fancy amenities, think about moving to the older apartment complex with little to no amenities and smaller units.
If you’re in the market to buy a house, buy one that is smaller and cheaper than what you can afford.
It’s tough to reign in your spending, but if your financial situation is teetering on a knife’s edge, finding more humble living accommodations will relieve an enormous amount of financial pressure every month. Plus, you tend to get used to wherever you’re living. Yes, there’s a chance you’ll find yourself wishing you were living in a bigger, nicer place, but you’d probably be thinking the same thing even if you were living in a bigger, nicer place.
But there’s another strategy for saving money on housing that might be the best solution for most people:
The term “house hacking” actually refers to a collection of strategies designed to lessen the financial burden of housing expenses.
If you want a more complete discussion of all the strategies, check out the post I wrote on it:
For the purposes of fighting inflation, the simplest advice boils down to this: Find a roommate ASAP. Rent out a room in your house. Put bunk beds in your apartment. Just get someone else to share the burden of your housing costs.
And if you can get your new roommate to chip in for utilities, even better. Bills get a lot more manageable when more than one person is paying them.
Have you ever run the basic, back-of-the-envelope math on food? It goes like this: Most people eat three meals a day. Over 365 days a year, that works out to 1095 meals. Let’s just round it down to 1,000 in case you skip a few meals (and because it makes the math easier to do in your head).
This means that if your average meal costs $5, you’ll spend about $5,000 on meals in a year. But if you have four people in your family and the average meal costs $5 per person, you’ll spend an astounding $20,000 a year (4 people x $5/meal x 1,000 meals/year).
This means that anything you can do to lower the average cost of a meal by just $1 will save you $1,000 a year per person in your family.
So what’s the best way to lower your average per meal cost? Simple, eat out less.
I break this down further in the post below, but there’s no way around the fact that cooking at home is way cheaper (and usually healthier) than eating out.
Saving Money Eating Out
If for whatever reason you can’t bear to bring yourself to cook, at least look for ways to save money when eating out. Remember, lowering the average cost of your meals by a dollar saves you $1,000 a year.
One way I like to think about saving money when eating out is something I like to call “downshifting tiers.” What I mean by that is that the kind of food and corresponding price levels you find when eating out can be grouped into different tiers:
|1||Fast food dollar menu/Value menu|
|2||Regular fast food|
|4||Sit-down family restaurant|
The prices (and usually, the quality of the food) go up with the tiers. So if your average meal out is somewhere between tier 3 and 4, try and replace a few tier 4 meals every month with tier 3. And while you’re at it, maybe swap out a few tier 3 meals for tier 2.
The brutal truth is that when inflation is as bad as it’s been in the last year and a half, playing defense can be pretty tough. It might amount to a lot of work just to keep treading water.
Instead of just reacting to what the world throws at you, you can try fighting back.
Because if prices go up at the same time your income goes up even more, you come out ahead.
There’s a few different strategies you can use to try to boost your income.
The Traditional Route: Landing a Raise
The first step to getting a raise is pretty straightforward: Set up a meeting with your boss and ask for one. If you’re too timid to directly ask for a raise, ask what it would take for you to earn a significant promotion.
This step alone accomplishes a few things. First, it lets your employer know that you want more. You might think that they already know that, but they don’t. They know that everyone in general wants more pay, but they don’t know that you specifically are actively seeking a promotion until you tell them.
Another thing it accomplishes is that the reaction you get will give you a clue as to whether you should work hard at your current job in hopes of earning a promotion, or start applying elsewhere. If they seem willing to work with you (even if they drag their feet a little), working hard for a promotion will probably pay off. If they say or imply that a promotion doesn’t seem likely, it’s time to look elsewhere.
The final thing that it does is that it gives you specific targets to aim for. It’s one thing to just try to work harder and hope the boss notices. It’s something else entirely to figure out what kind of work your boss thinks deserves a huge raise and deliver them the exact results they asked for. A major key here is to send them an email after the conversation thanking them for their time and recapping the major points. That way there is a written record of the fact that you asked as well as the specific direction you were given.
The Side Hustle Part One: Freelancing
A few years ago I landed my first freelancing gig. It was crazy to find someone that was willing to pay me to write.
The short story of how it happened was that I created a free account on Medium and started writing about a variety of topics. Then I went over to the job boards at Problogger. Once I found a job posting that looked interesting, I applied and linked to 3-5 of my most relevant Medium posts.
I never heard back from most applications, but you don’t need everyone to say yes. Eventually I found a company that hired me to write personal finance articles for an investment company.
I remember that I was such a novice that when they told me to send them an invoice for my first project I literally had to Google “how to send an invoice.” But that’s the beautiful thing about starting before you feel ready; you’ll figure it out as you go on.
The Side Hustle Part Two: Build Something Bigger Than You
Getting paid for showing up is great for dependable income. Getting paid by the project is better if you can figure out how to get projects done efficiently. But if you can figure out a way to get scale, the best way to get paid is based on your results.
When I talk about scaling, I mean setting up a system that will multiply your results beyond their normal limits. For instance, it’s one thing to write an article freelance, it’s another to publish it yourself and keep getting paid on it every month.
When it comes to this website, I’m doing it in part to share what I’ve learned, and in part because the internet will continue to let people discover it for years to come. Eventually this site is going to have advertisements, and when it does, I will start making money on articles I wrote years ago. So the trouble with this approach is the fact that it pays the worst in the short run. But it can become powerful if you stick around long enough for the returns to accumulate.
Protecting Yourself Against Inflation the Simple Way
So at the highest level, you have two options: Offense or defense.
If you choose to play defense, your best bet is to try to control your biggest expenses. Most people spend more on housing than anything else, but housing takes some work to change. With food it’s a little easier to adjust on the fly because you make decisions around food multiple times a day.
If you play offense, the biggest thing is your strategy. Are you going to make more money from your current work, look for more work on the side, or try to build something bigger than yourself? There’s no perfect answer, just a series of trade offs.
The core idea of personal finance is to spend less than you earn and invest the difference. Inflation makes it more difficult to do this, but the core ideas remain the same: Figure out how to spend less, earn more, and invest well.
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