How Inflation Affect On Consumers and How Can You Protect Your Money Now

Plenty of us have our older generation telling us that how things used to be cheaper back in their days, and how thing are more expensive now. For example in 1908, a Hershey’s chocolate bar cost only 2 cents, while the same chocolate bar cost $1.34 at your local store. Inflation is the increase in price of goods and services over a period of time. Inflation impacts all of us as consumer, what inflation does is, it devalue our currencies. So over a long term period of time, if you are not managing your wealth properly, inflation can eventually eat up the value of your money. So how inflation affect us as consumer and how to protect our money now?

How it Affects on Consumers and People who are in Debt
Inflation is something that we can’t bypass. With inflation, prices of pretty much everything rise. The cost of the medical fees, school tuition fees, your rent, and even to as simple as a hair cut in the barbershop. The worst case is, if your income hasn’t increase, or you’ve been living pay check by check, you’ll be trying to pay for the increased costs of items on the same income. So inflation can be tough on your wallet especially during hyperinflation if you don’t manage your wealth properly now. In addition, inflation can be dangerous for consumers or business owners who are highly in debt. Many people borrow money from a lender at some point in their lives whether it’s in the form of a student loan, car loan, or even mortgage. When inflation rises, the Federal Reserve will increase the borrowing rate. And the rates then passed to individual consumers and business borrowers. So this leads us, consumers and business borrowers to have to pay high interest on the debt that they have already had. These can lead to debt trap cycle for people who are deeply in debt. So let’s just hope that our inflation rate is stable, and stays away from those credit cards and debts that can ruin your financial life.

How it Affect on Savers?
For saver with cash under their bed or receiving fixed interest payment, then higher inflation rate could reduce the real value of their savings. For example, if the government bond is giving 3% yield while the inflation rate is at 2%, then you will realize a real interest rate of 1%. However, if inflation rises to 7%, and the interest rate stays at 3%. Then the effective real rate is at -4%, which mean their savings is reduce in value. Inflation can erode consumer purchasing power over time, especially if you are on a fixed income. $1 million dollar in the 1940s has a larger purchasing power than a $1 million dollar in today’s term. Let’s take an example, in the 1940s with a million dollar; you are able to buy so much more. Houses weren’t always this expensive as today. In the 1940s, the median home value in the United States was just $2,938. In the 1980s, it was $47,200, and by 2000, it had risen to $119,600 according to date from the U.S. Census. This shows how savers in the long term will lose out a big opportunity in purchasing power. I’m not against people that hold cash for temporary investing technique. Sometimes it’s good to hold cash. Warren E. Buffett mentions that Cash is King. He keeps a ton of it at any given time. Having cash gives you the ability to purchase and seize good investing opportunities.  However, in the long term holding majority cash for a long majority time horizon is not a good wealth management strategy, since the value of your dollar is not the same in decades to come.

How Dividend Growth and Value Investing is a Good Strategy to Protect Your Money Against Inflation.
Dividend Growth and Value investing is a good method to protect your wealth. I say this because I myself is heavily invested in the American stock equities that pays out good dividends. Dividend growth companies give you the ability to receive cash dividends from the companies you invested in. And the thing I like about having invested in these companies is there’s a high chance they may increase their dividends over time. These dividend increases can provide excellent protection against inflation in the long run. For example, let say you had follow Warren E. Buffett way in investing on a company called Coca-Cola Co (Ticker: KO) in 1988 after the stock market crash of 1987, not only you would have receive a good amount of dividend yield to cost, but also from stock price appreciation. Warren E. Buffet had bought more than $1 billion of Coca-Cola Co shares in 1988, an amount equivalent to 6.2% of the company, making it the largest position in Berkshires Hathaway’s Portfolio. You will be amazed how his Coca Cola has impacted his wealth now. On January 15, 1988, Coca Cola shares sold for $2.45 per share (split-adjusted), and as this article is written, the stock is now trading at $49.34 which made his investment return of 2000%. But not only had Capital Gain protect his wealth against inflation, but the dividends payout that Coca Cola is paying now has also increased. As of 2018, Coca cola paid an amount of $1.54 of dividend per share. The dividend is 60% of the initial cost of Warren Buffett’s 1988 investment which if we do the math 60% of $1 billion dollar equal to $600 million dollar in dividends just for 2018. The dividends collected from Coca Cola by Warren E. Buffett in 2018 enable him to purchase more quality companies that can generate him more dividends. But if in 1988, Warren Buffett had not invested that one billion dollar, he wouldn’t have the wealth he has today since money would just be just 60% of his dividend income from Coca Cola if he had invested in 1988.

I hope from this article, you guys will understand how inflation can impact us negatively, especially during hyperinflation. Inflation not only erodes the value of our currency, but affects the prices of goods and services around us. Inflation is something we have to take into consideration, because the road to financial freedom requires us to understand that inflation is a factor that we can’t avoid. As we get older, we will get more responsibility, and more expenses that we have to count into factor. So to prepare us towards the future is to stay away from those credit card debts and start investing our money now so we can attain the financial freedom we want.