Right now, we’re facing some brutal inflation – inflation that’s at the highest rates we’ve seen in 40+ years, and there’s no sign that it will slow down anytime soon.
Let’s talk about inflation – what it is, why it’s here, and most importantly, what to do about it – what your options are, things you should consider, and how to prepare yourself and your family for what’s to come.
Inflation 101 – What Is It?
At its most basic level, inflation is when prices of goods and services go up. As prices rise, your purchasing power goes down (in other words, that same $100 can’t buy the same thing now that it could a year ago).
The price increase reflects the gradual decrease in the value of money because of inflation.
Moderate Inflation Is A Good Thing
While many think of inflation as a bad thing, some level of inflation is healthy and keeps the economy strong. A stable economy needs a stable level of inflation, but when inflation gets too high or too low – that’s when there are problems.
When inflation is high (as we’re seeing now) and wages can’t keep up with the rate of inflation, purchasing power for those wages decreases. This can lead to a rise in labor costs (as workers ask for raises to try to keep up with inflation), which results in lower profits for businesses.
High inflation can also lead to higher interest rates, as the Federal Reserve raises rates to try to cool the rate of inflation – and this is exactly what we’re seeing now.
High Inflation Creates Economic Uncertainty
Altogether, these effects of high inflation can create extreme economic uncertainty, which is exactly where we are now.
But just because there’s fear and uncertainty out there doesn’t mean that you should sit back and do nothing. In fact, great fortunes have been made and lost during times just like these in the past.
And while there’s no one single “right” or “best” path for you to take, depending on your unique situation, it’s critically important that you understand the landscape, as well as your options, so you can make a conscious decision on the best course of action, before inflation and high-interest rates degrade the wealth you’ve worked so hard to create.
So, let’s talk about the options ahead of you, as well as the pros and cons and short-term and long-term impact of those options.
Option #1 – Do Nothing and Keep Your Money In A Savings Account
The simplest and easiest course of action would be to do nothing, and this is the course of action many are choosing right now, mainly because they’re scared and not sure what to do.
Even if you do have some of your money in a diversified portfolio of investments, I’m guessing that you have a certain portion of your savings (not counting your emergency fund, which you should keep liquid) that’s sitting idle in a bank account.
As of the week of May 18, 2022, the national average interest rate for savings accounts if 0.08%. Yes, you read that right – for all intents and purposes, that’s essentially zero.
I hope this number gives you the wake-up call you need.
This means if you had $100,000 in a savings account today at Chase, in one year’s time, assuming you spent nothing, you would have earned in interest…
That’s right. If you were to put $100,000 into that savings account today, it would be $100,010 in one year. Yes, that’s right. The bank gets to leverage your $100k for a whole year and tosses a mere ten bucks your way.
Outraged? So am I. And this is exactly why your savings account is NOT the best tool in your tool belt right now. It may give you a (false) sense of security in knowing that the number in the account will be the same day in and day out, but with inflation on a rampage at 8%+, that means your money is losing significant value every day that it’s sitting there.
So, if leaving your money in savings won’t do, what other options are available? Let’s look at a few other options.
Option #2 – Put Your Money into A CD (Certificate of Deposit)
There’s nowhere to go but up from those abysmal savings account rates, so let’s forge ahead. A CD can be a great alternative to a savings account in that you aren’t taking on additional market risk.
Your money is locked in for a set amount of time, and in exchange for that lower liquidity, you get higher rates than you would with a savings account. But the question is, are CD rates high enough to match or beat inflation?
Here are the rates for CDs, as of (May 24, 2022):
- 1.01% at Citibank for a 5-year term
- 1.30% at Capital One for a 1-year term
- 1.70% at CIBC for a 2.5-year term
- 1.75% at Ally for a 1.5-year term
- 2.00% at Capital One for a 2-year, 2.5-year, or 3-year term
- 2.00% at Ally for a 20-month, 3-year, or 5-year term
The highest CD rate I was able to find was 3.21% for a 5-year term with a minimum $5,000 deposit at Connexus Credit Union.
Even with that 3.21% annual rate over 5 years – which is substantially better than the 0.01% annual interest rate you’d get with a Chase savings account – you’re still significantly below the 8%+ rates of inflation we’re seeing of late.
And don’t forget – you will owe taxes every year on the total interest accrued for your CDs, which brings that rate of return down further.
So, while we’re moving in the right direction, we’re not quite there yet.
Option #3 – Invest in The Stock Market
This next option is for adventure seekers. You know, those of you who love thrill rides and roller coasters. Buckle up because the stock market is ready to take you on a ride.
The past decade or so has been great for the stock market. From 2012 through 2021, the average stock market return was 14.8% annually for the S&P 500 index.
But of course, averages are just that. They’re averages. The returns for any given year could be way up or way down, hence the roller coaster.
The Ups and Downs Of The Stock Market
During the period from 2012 to 2021, the annual returns varied from -4.4% to 30%+. Of course, everyone wants to invest in the years when the returns are 30%, and if you could be guaranteed 30% annual returns, you would outpace inflation, even after factoring in the additional tax burden.
But the thing is, the stock market is not like a savings account. The stock market doesn’t come with a steady and predictable rate of return. For some months and years, you’ll do great. Other times you’ll be in the negative, and that’s why people tend to look at averages.
When you look at stock market averages over the last 50 years (1972 to 2021), the average annualized return was 9.4%. If inflation continues to hover around 8%, in theory, you’d be above that. But again, that’s assuming the average stays at or above 9.4%.
Don’t Forget About Capital Gains Taxes
Keep in mind also, that you’ll need to factor in capital gains taxes, which can be substantial, particularly for any profits from the sale of an asset held for a year or less.
For taxes on profits from the sale of an asset held for longer than a year, those long-term capital gains taxes can be as high as 20%. Let’s just play this scenario out for a second (keeping in mind that we’re not CPAs and that this scenario is just for illustration purposes and should not be construed as tax advice).
A Simple Example – Investing $100k In the Stock Market Today
Let’s say you were to invest $100,000 in the S&P 500 today, and in two years, you make $18,800 in returns (assuming an average of 9.4% per year).
Then you decide to sell, and you owe 20% taxes on those gains. That 20% of $18,800 would be $3,760, bringing your total net returns to $15,040.
$18,800 total return – $3,760 hypothetical 20% taxes = $15,040 net return
The question then, is whether that $15,040 still outpaces inflation. Well, let’s do some simple math. At $15,040 for 2 years, that means a net return of $7,520 per year, or 7.52% – which unfortunately is below the 8%+ inflation we’ve seen over the last 2 months.
And of course, if the returns are lower than 9.4% in any given year, then inflation wins (assuming inflation is at the 8%+ we’ve seen in recent months).
Again, this scenario is for illustration purposes only, and we always advise you to consult your own CPA for the specifics of your unique situation, but hopefully, this helps you gain some perspective on the realities of investing in the stock market and what it actually means for your bottom line.
So, if savings accounts, CDs, and stock market investing don’t reliably help you outpace the high rates of inflation we’ve seen, what will?
Option #4 – Invest in Real Estate
You know what they say – success leaves clues. So, when you want to find financial success, you look to those who have built and maintained wealth through multiple downturns.
And when you do that, you see that the wealthiest 1% of the population has been investing in real estate for generations. In fact, 90% of all millionaires became so through owning real estate.
The ultra-wealthy understand that it’s important to own physical assets, particularly those not correlated to the wild swings of the stock market, which is why real estate is so popular among this crowd.
However, investing in real estate isn’t for everyone. Just like the pros and cons of investing in the stock market, real estate comes with its own pros and cons. One of the biggest downsides of investing in rental properties is the work that comes with being a landlord, even when you have property management in place.
But thankfully, through the power of real estate syndications (group investments), you can invest passively and reap all the benefits of owning real estate – including cash flow, equity, appreciation, and tax benefits – without the time commitments of being a landlord.
Further, because commercial properties (which are the assets most syndications invest in) are valued based on the income they generate rather than the value of similar properties nearby, there’s a substantial opportunity to force the appreciation through value-add business plans, thus further growing your investment.
A Quick Example – Investing $100k In a Real Estate Syndication
Given that, let’s take a moment to look at an example of a real estate syndication and the returns you might receive through investing.
Keep in mind that different syndication offerings can differ in their asset classes, asset types, business plans, and return profiles, but we’ll use some middle-of-the-road numbers to give you a ballpark idea of how this type of investment compares with the other options we’ve discussed previously.
Let’s say that you were to invest in multifamily real estate syndication with a 5-year hold, a projected average annual return of 18%, and a projected equity multiple of 1.9x.
If you were to invest $100,000 in this syndication, you might receive ongoing cash flow to the tune of, say, 4-7% per year, plus an additional payout upon sale of the asset, totaling the 18% average annual return over the 5 years.
In other words, if you were to put in $100,000 now – in 5 years’ time, you would get that $100,000 back, plus another $90,000 or so through a combination of cash flow paid out during the life of the hold and the profit from the sale of the asset.
Real Estate Is In A League Of Its Own
When comparing that 18% annualized return to the 0.06% average savings account rate, the top CD rate of 3.21%, or even the average stock market return rate of 9.4% – it’s clear that real estate is in a league of its own.
With that 18% annualized return (and again, this is just an example; actual returns will vary), you have a substantial buffer above and beyond the 8% inflation we’ve seen over the last few months.
That same $100,000, which would be steadily losing value in a savings account or CD, or roughly breaking even in the stock market, on average, could not only maintain its value in a real estate syndication but could also help you build much-needed wealth in these uncertain and turbulent times.
What’s Next? How To Take Action To Protect Your Money Before It’s Too Late
If you’ve made it this far, hopefully, you see the full picture. It should now be clear that doing nothing and keeping your money in a savings account is the worst thing you could do for your hard-earned and hard-won wealth right now.
Inflation is at a 40-year high, and there are no signs that it will slow anytime soon. What that means for you is that you need to figure out a way to outpace inflation, or at a minimum to keep up with inflation, or else risk losing value in your overall wealth.