rental property investing

How Does Inflation Help Investors?

As consumers it’s important that we understand the economy when making spending decisions.

One particular aspect of the economy that affects our daily lives is inflation.

Economic Inflation is a fancy term for price increase.

When prices increase, we have less purchasing power. What our dollar could have bought at one point in time can longer do so because of price inflation.

For example once-affordable-tuition-prices have inflated to ridiculous levels creating student debt problems for many people including those of us Under 30 folks that still are in school or recently graduated.

What did it cost to go to the following schools in 1960?

  • Harvard = $2,370
  • University of Chicago = $1,740
  • Duke = $1,475

Today those same schools are likely above $50,000 per year when you factor in all the costs of college especially for out of state students.

When things inflate too much and become overpriced for their worth, a bubble forms. See this image to understand what a bubble looks like on a graph.

housing-bubble-inflation

At some point the bubble will pop and come back to reality. Often times it will actually dip below the normal growth line for a brief period of time and smart investors realize this is the time to buy cheap assets that are below market price.

Now let’s get into the cycle of economic events that transpire from inflation in greater detail. You’re about to see a chain reaction that results and learn why exactly inflation can have a negative impact on the economy.

Inflation & its Effects on the Economy

Inflation is not a good thing for the economy because it slows economic growth. Here’s how:

  • When things cost a lot people spend less money.
  • When people spend less money, businesses suffer and are unable to grow.
  • People also borrow less money because of the risk and mainly because they can’t afford the high costing loans.
  • Less purchasing by consumers basically means there is less demand for a product or asset.
  • This asset or product has too much supply now causing prices to lower in order to sell off the excess and avoid being stuck with unwanted inventory.
  • It also slows production of this product or asset which means people become unemployed.
  • As unemployment increases, more and more people have no money flowing in and therefore can’t afford current lifestyle expenses such as bills, debts, and consumer goods.
  • People fall behind on debt payments, debt piles up, and in real estate, foreclosures pile up as people can no longer afford their homes.
  • Recession occurs.
  • Prices deflate as mentioned and people panic to sell which further deflates prices.
  • Smart investors realize prices are getting cheap and the right buying opportunities are soon to present themselves when bottom hits. They start looking for sources of capital to purchase up the cheap assets with.

How do we get out of recession?

Well to be honest, that is a whole other article but if you want the quick rundown:

  • The Fed steps in and lowers interest rates to encourage people to borrow money and increase spending
  • Consumers see that borrowing money is cheap now and begin making purchases
  • The Fed monitors the spending levels to ensure that inflation isn’t impacted in the long term. Putting off issues today without regard to the future impacts could be disastrous so that’s why the Fed has to carefully adjust interest rates.
  • By maintaining stable prices in the market, consumers will continue to spend money which will help the economy grow. Investors will also continue investing and building their wealth to hopefully make up for lost ground in retirement that occurred when asset prices deflated and they saw their net worth’s deflate as well.
  • Slowly the economy gains steam again and prices inflate at a healthy rate and assets increase in price again making people wealthier.

Overall, I hope you’ve gained a bigger perspective on inflation and if you have spare time, do some research online to learn how to take advantage of deflation periods. When the next crash happens you’ll be ready.

Resources

For more tips, tools, and time-savers, visit our Resources Section through the menu bar at the top of the page or access each of our resource pages through these individual links:

Be great today,

Nick Foy

P.S. “The best gift I can receive from a client or supporter is a referral” Thanks for the shares and support on social media! @Under30wealth

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