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We have been struggling with increased inflation for several years. How has it affected you and your family?
Inflation is not just an economic term. It's a reality. It affects us all every day, whether we realize it or not. From the price of bread or eggs to the cost of education and rent, inflation shapes our spending and savings. Staying ahead and being resilient will impact the way we live our lives and work toward our financial goals.
So how can we navigate the current inflation uncertainty? There are different possibilities.
Table of contents
Develop a spending plan
First I have to make a confession. I've never been particularly good at traditional budgeting. Do you know what species I'm talking about? There you record every dollar and know how every red cent is earned or spent – the finer details. Some people love this type of accounting and have more power because of it. It was just never my thing.
Despite this confession, it doesn't mean I approach finances blindly. Instead of budgeting, I use what I call a “spending plan.” It's a more flexible approach that can adapt to your goals or whatever comes your way.
What is it? A spending plan is all about understanding your financial cash flow. This means you know how much is coming in, how much is needed to cover major expenses, and that you have a general idea of where the rest needs to go each month.
Where else should you send your income? First, I put some money into savings and set aside some for investments while I work on my financial goals. And beyond that we can make modest expenses.
For my family, our spending plan is focused on experiences and travel – we tend to spend less on goods. And your spending plan will be different depending on your needs and wants.
The key to a spending plan is that you allocate specific amounts of your monthly income to save and invest. If you exercise discipline with this part of your spending plan, inflation won't affect you as much – or at least you won't walk around with fear in the back of your mind. Because your spending plan will help you secure the investments needed to stay ahead of inflation. Speaking of…
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#190 How Inflation Has Shaped How We Spend, Save, and Invest, ft. Peter Kim, MD
Channel your income into investments
The Consumer Price Index, or CPI, is a tool that helps us see how much the prices of everyday things like food, clothing, and housing rise or fall over time. It gives us a sense of how much the cost of living is changing.
In April 2022, the CPI peaked at 7.79% but has since cooled to 3.1%. The recent rise in inflation has me wondering: How much has my family's spending increased in areas like food and dining out? Well, I found that we spend 15-20% more on groceries and dining than we did two years ago. A Chipotle meal now costs $20. A McDonald's meal costs almost fifteen dollars. Yikes!
Many factors play a role here. The main reason for this is rising food prices – not to mention my growing children. As a family, we are struggling with rising costs. And in general there has been no corresponding increase in annual salaries.
This means that inflation erodes the value of money and reduces purchasing power. A thousand dollars doesn't go as far as it used to. By understanding the impact of the CPI on our spending, we can better understand that we can stay ahead of inflation by investing in assets that keep pace with inflation or grow faster.
Quickly convert your income – be it medical income, business income, passive income or a combination thereof – into accretive assets. I focus primarily on real estate, followed by stocks, bonds and commodities (like gold).
It's about taking the income from our jobs and then quickly putting it into appreciative and cash-rich assets, slowly taking our “working time” out of the financial equation – meaning our money starts working for us. It grows passively on its own outside of your day job. This is a long-term winning strategy.
Focus on long-term holding
When it comes to assets – real estate, portfolio stocks, bonds and commodities – it is important to focus on long-term acquisition and holding. Since I invest primarily in real estate, that means I can get a lot of syndications. The goal is to ultimately create long-term cash flow that can withstand economic fluctuations and grow over time.
Across all asset types, real estate commodities are typically considered a strong hedge against inflation, meaning that the value tends to increase with inflation. That's because the prices of things needed to build new homes – lumber, steel, concrete and everything else – rise with inflation, increasing the value of your own properties. On the other hand, salaries do not rise steadily at the same rate every year.
For those who like investing in stocks and bonds, diversification is key. When you build a diversified portfolio, you don't have all your eggs in one basket, so your wealth grows steadily regardless of the nuanced ups and downs of the market.
So during times of high inflation, your expenses may increase, but the good news is that your assets continue to grow, helping you stay one step ahead.
Know the risks
When looking for long-term investment opportunities, you need to make your decisions carefully.
What is your risk tolerance? Find out what's right for you and how much risk you're willing to take while beating inflation to achieve your financial goals. Click here to learn ways to increase your risk tolerance.
Risk can be determined in various ways. If your income is based primarily on your medical income, how much financial security does it provide? Would you be greatly affected by a single management change, an insurance change or the addition of a private equity firm? If your daily income fluctuates and can be easily affected, your risk tolerance may be lower at this time.
When assessing the risk of long-term investing, start by doing your homework based on the asset class. In real estate, I look at the internal rate of return, the equity multiplier and the capitalization rate, among other things. These quickly show me whether the target property has intrinsic value for long-term growth, reducing my risk while staying ahead of inflation. This allows me to invest more comfortably while maintaining my risk tolerance.
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What happens next for the economy?
I don't have a crystal ball, but I have a strong feeling that the Fed will try to cut rates in 2024. Interest rates will begin to fall. And what will that do? It stimulates the economy and encourages spending. The money will flow back into the market, meaning big players out there will have no problem buying back into the system. For some asset classes, such as commercial real estate, it may take a little longer.
But when this pivot occurs – the so-called “Fed pivot” – assets will rise again. It is therefore important to consciously counteract this wave of high inflation. We only get a few of these opportunities throughout our lives. If you're able to time an economic downturn perfectly and ride that wave for a few years while your long-term investments grow, it can have a life-changing impact on your financial future.
These are complicated topics, and a single article is not enough to do them justice. Make sure you are part of a community that has the same mindset as you when it comes to long-term investing and risk assessment to stay ahead of inflation.
Here at Passive Income MD we have a number of communities where you can find like-minded people. Consider joining our Passive Income Doc Facebook group with thousands of doctors who are also on the journey to creating their ideal life through various income streams.
Until next time, stay informed, stay connected and stay proactive!
Peter Kim, MD, is the founder of Passive Income MD, creator of the Passive Real Estate Academy, and offers weekly training through his Monday podcast, the Passive Income MD Podcast. Join our community in the Passive Income Doc Facebook Group.
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Create your very own Auto Publish News/Blog Site and Earn Passive Income in Just 4 Easy Steps
