💰 Keeping up with inflation

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Welcome back Builders & Keepers!

If you have recently observed an increase in the cost of goods over the past few months, then you may have already felt the effects of inflation.

There are many stories of people who have overlooked the importance of inflation and paid a heavy price for it.

For example, retirees who saved their entire lives for retirement but did not account for the impact of inflation on their savings. They found themselves with less purchasing power than they expected and had to adjust their lifestyle accordingly.

Take inflation seriously

I recently had a coaching session with the regional head of a particular real estate company in Dubai. As we were discussing, he opened his Excel sheet that shows his retirement number.

I have never met anyone as savvy as he is when it comes to his money. However, there was just one problem—he did not account for inflation in his computation.

The consequences of not taking inflation seriously are dire: we could be forced to work longer than we want, cut back on our standard of living, or even face poverty in old age. For this client, his shortfall would have been close to 20 million pesos ($1.1M) had he continued living his life and building a retirement fund that didn't include inflation in the computation.

On the other hand, if we plan and account for inflation, we can enjoy a comfortable retirement and maintain our standard of living.

So, here are three actionable steps to prepare for the impact of inflation today and in the years ahead.

NOTE: I won't mention things related to a tight budget and spending because that's what people do to combat inflation.

#1. Be exceptionally good at something

Warren Buffet said, "The best protection against inflation is your own earning power." That's why being good at something can lead to higher earnings, which can help us keep up with inflation.

Don't just do it for the money, though. It's also more than just doing what you love. In my experience, the secret to being exceptionally good at something is to do work that your strengths align with and that you'll always be curious about. I also have friends who own profitable businesses that revolve around what they are good at and who have endless curiosity about honing their craft.

So, focus on developing a skill or expertise in a particular area. This can be anything from coding to cooking as long as it has value in the marketplace.

To put this into practice:

• Consider reading a book, taking a course, or certification

• Attend relevant workshops - do this for the learning and the opportunity to grow your network in your industry.

• Find a mentor in your chosen field.

#2. Run Your Numbers

Running your numbers is essential to know how much you need when you factor in inflation. It helps in decision-making because it gives you a clear understanding of your current financial situation, future financial goals, and the steps you need to take to achieve those goals.

You can start by:

• First, calculate how much your retirement expense is factoring in inflation: The formula is Annual Retirement Living Cost At Present Value (1+Inflation Rate) ^ Number of Years Til Retirement. Example: 1.2M Php or $24K per year (1+5%) ^ 10 = 1.9M Php or $39K. It means with a 5% annual inflation rate, the things 1.2M Php can buy today are worth 1.9M Php assuming that you plan to retire 10 years from now.

• Next, you can determine your required Total Retirement Fund by multiplying it by 25 years. Example: 1.9M Php * 25 = 47.5M Php ($950K).

• Have a Financial Plan - you can work on these numbers by having a plan that is essential for preparing for the impact of inflation. A financial plan includes a budget, a savings plan, and an investment strategy. The best practice is to seek the help of a fee-only Financial Planner (not a Financial Salesman) to help you with your plan.

#3. Invest in assets that outpace inflation

Investing in assets that outpace inflation is crucial to maintaining your purchasing power. These assets have historically outperformed inflation over the long term. Examples of such assets include stocks and real estate.

Get yourself familiar with:

• Cost Averaging - an investment strategy where you buy a fixed amount of a particular investment at regular intervals, typically over a long-term period, to reduce the impact of market volatility and potentially increase returns over time.

• Investing in a low-cost index fund - avoid the savings plans sold in the market because of their high fees. An ETF I invest in for retirement is Vanguard Lifestrategy Fund (V80A) due it its simplicity and cost-efficiency.

• Buying rental properties - real estate investments can provide a level of protection against the negative effects of inflation by increasing in value and generating income that can keep up with inflation over the long term.

In conclusion, inflation will always be there whether you’re building or preserving wealth. This is why taking it seriously is critical for your financial well-being.

Being exceptionally good at something does not only help you beat inflation in the short term, but it also allows you to invest more for your future. Running your numbers makes you realize how much your ‘good life’ costs when you retire and investing for the long term will allow you to reach that financial goal.

Remember, it's never too late to start. Take action now, and you'll be on your way to a brighter financial future.

Ready to grow your value so you can build your wealth?

Whenever you’re ready, here are two ways I can help you:

• 1-on-1 Personalized Coaching: A three-session coaching program where we’ll discuss your financial goals, build your own money management system, improve your money habits and guide you on how to invest on your own.

• Group Coaching: Four live 60-minute zoom calls that will guide the students on the step-by-step guide to improve their finances.

Learn more by scheduling a 30-minute discovery call here.

DISCLAIMER:

There are countless ways to calculate for a person’s retirement fund, the computation shown here does not consider the implications of tax, pensions and other factors that can affect a person’s retirement income. Also, the information provided in this newsletter is for educational purposes only and should not be considered financial or investment advice. The views and opinions expressed in this newsletter are those of the author and do not necessarily reflect the official policy or position of any organization or entity. Before making any financial or investment decisions, readers are encouraged to seek professional advice from a qualified financial advisor or investment professional. The author and publisher of this newsletter shall not be held liable for any losses or damages incurred as a result of the information provided herein.