How inflation can benefit you over the next decade

How Inflation Can Benefit You Over The Next Decade

With all the new money being pumped into circulation by the Federal Reserve, have you considered the impact this will have on inflation? The Fed just printed 2 trillion dollars in cash to distribute and by the time this is all over it could be closer to 4 or 5 trillion. For reference, the amount of money in the US money supply was under 4 trillion dollars as of November 2019, according to the Federal Reserve.

If we double the money supply, will there will be inflation?

Here’s the definition of inflation according to Investopedia:

Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. It is the rise in the general level of prices where a unit of currency effectively buys less than it did in prior periods. Often expressed as a percentage, inflation thus indicates a decrease in the purchasing power of a nation’s currency.

Here’s another way to look at it. If inflation increases in the near future, your salary will most likely go up, creating the illusion that people are making more money and everything is just fine. But consider this…what if your salary goes up but so does everything else? What if your grocery bill doubled? What if your monthly bills doubled? What if child care doubled? What if your health care and insurance premiums doubled? If the money in your bank account has half the buying power it had a year ago, would an increased salary make up for all that?

Bad News = The Fed is doubling our money supply

Good News = YOU can win in this new environment if you know how inflation works

Let’s consider inflation in terms of real estate investing. If the value of the dollar is declining due to inflation, then the debt you owe is losing value as well. Take a minute to let that sink in… Here’s a short story to put this into perspective. I recently looked up the historical sale prices for a house that my wife and I bought and sold a few years ago. The house was a Tudor home built in 1932. This is an example of inflation in practical terms:

  • In 1932, the original sale price was $5,000
  • In 2010 the home sold for $235,000
  • In 2015 we bought the home for $480,000
  • In 2017 we sold the home for $600,000
  • In 2020 the comps are around $700,000

So, here is the lesson. If you acquire long-term fixed rate debt (a mortgage) then inflation is GOOD thing for you. Today, what is available to you and I today is the ability to obtain debt at historically low interest rates and pay them off with cheaper dollars as inflation rises and the dollar declines in value.

A Few Practical Takeaways:

#1 Consider refinancing your home so you have cash during this market correction. Forget about the 3% interest rate you would pay, because inflation will be more than that.

#2 Consider investing in real estate assets that have a conservative amount of debt or “leverage”. This could mean a home, but this could also mean investing in multifamily apartment syndications as my wife and I do.

#3 This could be an amazing opportunity to get started in real estate if you haven’t already!

Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.

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Joe Fairless