﻿Alright, so I think I have it figured out. The key to surviving through high
inflation is to buy things that aren’t affected by inflation.
So what better place to spend your money than at the Costco Hotdog line. Since 1985, Costco has
been selling its hotdog and soda combos for $1.50. Regardless of what the market is doing, inflation,
deflation, Costco has never increased its hotdog prices and has no plans to ever do
so. So if I can feed my kids and my wife Costco Hot Dogs everyday for breakfast, lunch and dinner
until this inflation thing dies down, I am technically beating inflation. Right??
Hi, if you are new to the channel, my name is Tae from Financial Tortoise - a channel dedicated to
helping the Sandwich Generation Master Money and achieve Financial Security. Unfortunately
my Costco Hot Dog idea got shut down. I mean the kids loved it, but the boss lady said no.
Hey, at least don’t blame me for trying to think outside the box.
Inflation is the hot topic these days when it comes to talking about the economy and money.
Google searches are up. The 2022 Social Security cost of living adjustment,
the COLA, at 5.9% is the largest increase to Social Security benefits since 1983.
And even the Ukraine-Russia crisis is referring to inflation and its impact on the economy. And many
of you are probably personally noticing the impact of inflation on your daily lives especially
whenever you are at the market or at the grocery store. Where I live in Southern California,
according to Nielsen’s consumer price index Bread costs are up 10% compared to last year Eggs are
15% more expensive And most disturbing, Bacon costs are up whopping 24% So, what does this all
mean? The fact is that rising inflation, though in moderation can be good for the economy, when it
goes out of control, like what it feels like right now, it can be quite detrimental. Rising inflation
takes away the purchasing power of the averager worker. The dollar he or she is making today
affords less consumer goods like bread, eggs and bacon, than the same time last year. So in this
video we are going to tackle some tough questions as regards to inflation. One, what is inflation,
really? What’s causing it? Especially right now. How worried should you be? And most importantly,
what should you be doing with your money? But before we get to the good stuff, if you can do
me a favor and hit the like button, I would much appreciate it. It really helps with the
YouTube algorithm and allows videos like this to be shared with more people in the YouTube world.
So, what is inflation? In a nutshell, inflation is the rate that the costs of products and services
increase over time. Essentially lowering the value of the money that you have today.
My wife and I moved into our current neighborhood about 10 years ago. There was an older couple next
door to us that had been living in their home since it was first built - in 1957. Given the
nosey person that I am, I looked up how much they paid for their home when they first purchased
it over 60 years ago. Whopping, $27,000. Can you believe that the same home is now worth 40x that?
That is inflation. And ofcourse there is a bit of home appreciation in there as well. In the
United States, the most famous and widely used indicator of inflation is the Consumer Price Index
also known as CPI. This measures the change in prices paid by consumers for goods and services.
It does this by measuring the price of an item in one period compared to its prices in a previous
period. For example, what was the price of a pack of bacon right now compared to the same
time period last year. Or the year before. But the bottom line is that inflation erodes purchasing
power over time. With inflation, your dollar tomorrow will not go as far as it does today.
But inflation isn’t necessarily a bad thing. And inflation isn’t anything new. We have seen it
every single year consistently since the beginning of time. This is why my neighbor’s home that cost
$27,000 in 1957 is now worth close to a million dollars today. And why a coke that used to cost
a nickel 70 years ago and now costs over $2.00 today. For the past several decades,
inflation has been quite steady. Around 2-4%. And when it remains this moderate,
it's actually a good thing for the economy. Moderate inflation is actually a sign of a
healthy economy. Let me explain. When the economy grows, demand for items increases. And this
increase in demand pushes prices a little higher as suppliers create more items that consumers and
businesses want to purchase. Workers benefit, because from the increase in demand for labor,
their wage likely increases. And with higher wages, these workers can go out and purchase
more items. Thus creating a ‘virtuous cycle’ of healthy supply and demand. Inflation isn’t
causing this, rather a moderate inflation is a reflection of this healthy, growing economy.
However, when it starts to push beyond the normal average of 2-4% and runs at 5% or higher,
it can be bad for the economy. Just to give you context, the last time we had inflation this
high was 40 years ago when Ronlad Reagan was the President. When it’s this high, essential goods
become unaffordable for the average consumer who’s paychecks aren’t rising as quickly as inflation.
Basic needs like food and gasoline become harder and harder to afford. Economy slows down. Less
items being sold. Less items being created by suppliers and less demand for labor. Companies
also not only need to deal with lesser demand but also higher cost of production on their end. Costs
of key parts like machinery or microchips are now more expensive than before. Layer this on
top of less demand from consumers, they might need to cut back their production or worse yet,
declare bankruptcy. So, the big fear right now is, with the current consumer prices up 7.5
percent, much higher than what we’ve seen in the past, what is going to happen? Will
it continue to increase and go out of control or do we see a light at the end of the tunnel?
But first, let’s try to wrap our heads around why we are even here in the first place.
The current increase in inflation rate can be attributed to a combination of several factors.
One is increased Demand. We as consumers are on a spending spree after having spent the most of
last year and a half being locked up at home. On the positive side, according to some studies,
the savings rate for Americans reached a record peak at the height of the pandemic. At one point,
it even reached an average of 33.7% in April 2020. However, as soon as the economy started
to open up, many of us went right back to what we do best. Spending money. Stimulus checks and
other pandemic-related aids like expanded child tax credits gave households even more purchasing
power. Additionally fueling this increase in spending. Increase in demands, higher the prices.
Second is limited Supply. The increased demand itself is not too much of a problem if suppliers
can readily meet the consumer needs. However, the US economy is also experiencing significant supply
chain problems tied to the COVID-19 pandemic. Factories have shut down, shipping routes
were clogged, all leading to limited supply of consumer goods pushing prices higher. And third,
increasing wages. Companies are needing to offer more money to retain or hire people. This is good
for those workers reliant upon their wages to keep up with increasing inflation. However,
with more costs the companies need to bear, they are often passing these higher costs to consumers.
So the trillion dollar question that everyone is asking at this point. Where is this headed
and should we be worried? Noone has a crystal ball so it's impossible to say for sure. But there are
arguments on both sides. Some officials are saying that they have yet to see evidence that the rapid
inflation increase will persist for the long run. Once the shortage of goods is addressed
by companies - figuring out cost effective ways to produce and transport what people want to buy,
they believe the sudden price increase will fade. However,
there are others that say that high inflation is here to stay. And high inflation can be
the new norm once consumers anticipate it as a permanent fixture. Workers begin to negotiate
higher salaries in argument that they need to be paid at least to match inflation. And companies,
facing high labor costs, pass on these costs to consumers. The virtuous cycle speeds up
and high inflation becomes a permanent fixture in our future economic landscape. However, who
really knows right? There are so many factors that are contributing to the current economic state,
so we all need to be careful not to get too caught up in the latest crystal ball prediction. However,
there are things that we can do to best prepare financially for this year and beyond. As the
famous saying goes “Focus on what you can control, and don’t waste energy on the things that you
cannot.” One simple step is to go to my website at financialtortoise.com and download your free copy
of “Sandwich Generation’s Guide to Financial Security - 10 Steps to Securing Your Family’s
Financial Future!” I’ll also have a link in the description below. I send out weekly newsletters
with other great tips on mastering your money and I wouldn’t want you to miss them. I’m going to
break down the rest of the strategies here into two parts; a good defense and a strong offense.
When it comes to a good defense, we want to effectively manage our expenses. Ofcourse, we
should be doing this regardless of high inflation, but it is especially more important right now
given everything costs more. An example is to hold off on making big purchases like a new car. Of all
the products in the market right now, the cost of new and used cars have increased much faster than
the average inflation. The cost of new cars have surged 11.1% over the past year and for used cars,
31.4%. It’s actually quite ridiculous. Cars are already a depreciating asset, so if you can hold
off on replacing your car for the time being, do it. A new car is not worth a 10 to 30% premium
right now. When it comes to your required spending like food and household goods, it might be a good
time to start that meal plan you always said you’d work on. My friend Bri, who’s also a dietician,
runs a website called Frugal Minimalist Kitchen and she has some great resources for those of
you who want to better plan your meals, reduce food waste and ultimately save money. Another
good inflation defensive action is to reassess your debt. Having debt shouldn’t be considered a
good thing, but in times of inflation, it actually works in your favor. In times of high inflation,
when you have a mortgage, while the value of your home is increasing, your mortgage rates
are locked in. And this is especially beneficial if you are locked in at a low interest rate.
Depending on your current interest rate, you might want to consider refinancing your mortgage to lock
in a better interest rate if possible. My wife and I have debated paying off our mortgage before,
but now with high inflation, I feel it makes more sense for us to keep our mortgage as long as
possible. Now let’s talk about a strong offense. A good defense is good to help you mitigate against
the impact of inflation, but without strong offense, you’ll just end up in the same place.
You want to get out ahead. And the way you do this is by purchasing appreciating assets. Of all the
things you can do to beat inflation, this is the most important action step of them all. When you
have your wealth invested in appreciating assets, inflation can’t really touch you. Imagine the
appreciating asset being a large, sturdy sailing boat and inflation being the rising tide. Your
sturdy boat will always be on top of the water because no matter how high the water rises,
your sturdy boat naturally rises with it. Not having appreciating assets in your portfolio
is like trying to swim your way to keep up with the rising tides. You have to constantly kick
and paddle just to keep up. And unfortunately, for most working people without appreciating assets,
they sink under the tide when it gets too high, like very high inflation. So what are good
appreciating assets you should have your money in? If you watch any of my other videos where
I talk about index funds, and you are invested in them yourself, you are already ahead of the game.
VTSAX, my favorite total stock market index fund from Vanguard, is a great inflation hedge. If
you have been investing in them, continue. If you haven’t, consider it a major part of
your portfolio. If you can check out my video on VTSAX here if you want to learn more. When
you own stocks, you essentially own businesses. In the case of VTSAX, close to 4,000 publicly traded
businesses in the United States. These businesses have assets and create products for its customers.
And the companies will ensure that their assets and products rise with inflation giving you that
inflation hedge. Another good appreciating asset is real estate. If they are financed with a good
mortgage, the fixed rate mortgage payment actually acts as a natural discount while the home price
increases with inflation. Though there are alot of factors that go into home price, like location
and type of property, property value in general tends to stay on a steady upward curve and in the
long run tracks or beat inflation. Ofcourse, you want to consider many factors before purchasing,
like how your local real estate market is doing and your personal finance situation,
but it is definitely an area to consider. If you’d like to learn more about when it is a
good time to buy a home, check out my video here on “when you should buy a home” where
I go into more detail. Thank you guys for watching and I’ll see you on the next one.