If you’ve followed any news in the personal finance space this year, you’ve heard one word mentioned more than any other. Inflation. In April, the Consumer Price Index (CPI) which measures inflation rose 4.2%. The fastest since 2008[1]. In May, it rose even higher, eclipsing 5% [2]. And June, 5.4%. Excluding food and energy, it’s the most inflation we’ve seen since September 1991 [3]. And it hasn’t slowed down either as it maintained a 5.4% rate in July, and August wasn’t much different [4]. Many sources are now indicating that high inflation is likely to persist for a while [5]. What this means is that everything is pricier and will cost more money. So, how can we afford the price increases? Is there a way to beat inflation? And if you’re only getting the standard 3% yearly raise, are you technically not getting any raise once accounting for inflation? Well, let’s get into it!

Consumer Price Index

The Consumer Price Index is a measure of the average change in prices paid by consumers for various goods and services like food, transportation, and shelter [6]. And typically, United States government shoots for a 2% increase in CPI per year [7]. That means if your typical gallon of organic unsweetened soymilk costs $5 this year, it should cost $5.10 next year if the government hits its 2% target. $3 gas would rise to $3.06, and you’d see that average 2% increase across the all the goods and services you pay for. But, due to a myriad of reasons from COVID like the economy shutting down, persistent supply chain issues, and the government printing tons of money for stimulus, inflation has subsequently increased significantly to over 5% [8].

Now typically, inflation has been around 2-3% and wages in the United States have grown to around 2-3% too [9]. For most, this equates to no raise at all. Sure, you’re getting a 3% raise, but your expenses are rising 3% too. Now with inflation at around 5%, you’re technically losing money with that same 3% raise. Fortunately, wages have been rising faster than normal but they’re still barely keeping up with inflation [10]. So, whether we’re dealing with a high inflation environment like today or not, what can we do to stop running on this treadmill without making any progress?

Win By Living Below Your Means

First, let’s discuss living below your means and saving money. And before you think you’ve heard this before, I want to share a fascinating use-case around salary and expenses. So, to make the numbers easy, let’s say you’re making a 100k salary. At the end of the year, you get a 3% raise and are now making a 103k. Well, if you’re living right at your means, and spending your entire 100k salary on expenses, then 3% inflation would wipe out your raise. But, if you were to live below your means, say with 50k of yearly expenses, then your raise would give you 3k extra per year while your expenses would only grow 1.5k. Leaving you with 1.5k more money that next year when originally you thought that 3% raise was nothing. That’s the benefit of living below your means. As Charlie Munger has said:

“One of the great defenses to being worried about inflation is not having a lot of silly needs in your life. In other words, if you haven’t created a lot of artificial demand to drown in consumer goods, why, you have a considerable defense against the vicissitudes of life.” [11]

Now if you were to go even more extreme and live off 25k per year, then your expenses would only rise $750, leaving you with $2,250 more that next year. It’s that simple. So, whether it be not getting that large raise you were hoping for, or inflation rising faster than expected, cutting your living expenses to only what you need to be healthy and happy is a great solution. And the more you cut, the more you benefit.

Win By Investing the Rest

Second, all that money you’re saving by living below your means could be invested in the stock market. Traditionally, when inflation has risen, so do companies’ revenues and profits after a period of adjustment [12]. For example, if you had $100,000 in cash, whether it be in a savings account or retirement account, inflation of 3-5% will make that money decline in value over time. This is because most cash accounts are paying returns of less than 1%. So, you’re losing money by saving it in a high inflation environment. But if you were to invest that $100,000 in the stock market, where it averages a 7-10% return, now you’re beating inflation and growing your net worth [13]. The stock market is often considered a great hedge against inflation as it typically rises faster than it. So, in high inflation environments, consider moving more of your money away from cash/savings accounts and more towards investments in the U.S. stock market.

Final Thoughts

Whether it’s inflation rapidly increasing your expenses, or your job not providing you that salary increase you were hoping for, there are solutions to this problem. First, make sure you’re living below your means. If your expenses equal your income, that’s a recipe for disaster. But if you’re living below your means, you can thrive in this environment. Second, you can take those savings and invest it in the stock market where historically it has beaten the rate of inflation. Now, instead of being worried about your financial future during this high inflation environment, you’re excelling in it. Almost to the point of enjoying inflation! I mean maybe… I’m not sure about that. It just sounded nice. But who knows? Either way, this is my plan for healthier and happier.

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Hey, I am Brandon Zerbe

Welcome to myHealthSciences! My goal has always been to increase quality-of-life with healthy habits that are sustainable, efficient, and effective. I do this by covering topics like Fitness, Nutrition, Sleep, Cognition, Finance and Minimalism. You can read more about me here.

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