Best Personal Finance Inflation Hedges

Inflation was already a stone’s throw from 8% before the outbreak of the war that involved two countries that account for a large share of energy and agricultural commodities worldwide.

It wouldn’t shock me to see that number reach 10% in the coming months.

Working in an industry obsessed with markets, I find that most of the questions people now ask about inflation come from the perspective of their portfolios.

Should I buy goods?

What about tips?

Is it too late to buy energy stocks?

Have you seen the returns on the Series 1 savings bonds?!

How can I hedge against inflation???

The way I see the time to prepare for inflation is early on, not while it’s happening.

From 2009 to 2020, the US stock market has risen more than 13% annually above the rate of inflation. If you’re a long-term investor, you’re hedge against high inflation before it ever gets here.

No matter how you manage your investments to account for higher rates, there are other ways to hedge inflation outside of your portfolio.

Here are some ideas for the best personal finance inflation hedges:

Costco Membership. Do prices go up at Costco just like other grocery stores? certainly. But buying in bulk is a good way to hedge against additional price increases if they occur.¹

Your Costco membership also comes with slightly lower gas prices, which pay at least for your annual membership and then some.

Plus, you can still get a Costco hot dog and a soda for $1.50, the same price it was in 1985 (I’m only half kidding here).

A 30-year fixed-rate mortgage. The whole reason to invest in the first place is to improve your standard of living. If you just bury all of your money in your own backyard, it will eventually lose its value over time:

You can think of religion in reverse. With debt, your liability is what loses value over time and that’s a good thing. This makes a low interest rate mortgage one of the best inflation hedges on the planet.

The median sale price for an existing home in the United States is now around $350,000. Assuming a down payment of 10%, using the average 30-year mortgage rate over the past five years of 3.7% gives you a monthly payment of approximately $1,450.

With inflation soaring to 8% over the past year, that means someone’s payment of $1,450 a month from last year would now technically be more than $1,335. I didn’t get the net after-tax cost of mortgage debt here but you get the idea.

The combination of rising home prices and lower mortgage rates has made housing probably the best inflation hedge for the vast majority of Americans over the past two years.

Holding on to fixed rate debt also means that you are not subject to inflationary pressures on rents.

Unfortunately, if you don’t have a home, you take it on the chin. According to the apartment listing, annual growth in rents was around 18% at the last reading.

The ability to replace. Last week I found myself in one of the happiest places on earth on a Friday afternoon – the liquor store.² I like to check out my canal on trips like this, so I asked the owner how inflation affected his business.

He told me he saw higher prices across the board, but the thing that surprised him the most was the new gas surcharge for ice delivery. He said they charged him $60 for $30 for an ice delivery.

I think we’ll see a lot more of this in the coming weeks and months. Uber just announced that it is adding a fee of between $0.45 and $0.55 per ride, while Uber Eats deliveries will include $0.35 to $0.45.

I know we’re all used to paying for convenience, but as prices go up some people will have to make different choices about how to allocate their budgets.

That extra $20 charge for DoorDash probably isn’t worth it anymore. Maybe go buy pizza instead of paying for delivery. You might sacrifice 1-2 nights of going out to eat to make up for your high utility bills.

For people on a budget, there are likely to be some trade-offs.

Avoid lifestyle creep. Inflation tends to hurt households on the lower end of the income scale and is the worst because they have almost no room in their budgets when prices for necessities are rising.

But the group that is easier to take advantage of with higher prices is the high-income group.

I wrote last month about Chanel raising the price of handbags from $5,200 in 2019 to $8,200 today. These bags refer to items that the wealthy are willing to pay.

Avoiding the siren song of luxury goods is a simple way to prevent the personal inflation rate from spiraling out of control.

The ability to negotiate higher wages. This option is not talked about enough in personal finance circles, but this is probably the best environment ever for workers to demand a pay raise.

There is an abundance of jobs, there is a shortage of workers and we are still in a world with pent-up demand from the pandemic. If you provide real value to the business owner, now is the time to ask for more money.

And if they don’t appreciate your work, there are plenty of options elsewhere these days. A recent study by Pew Research surveyed people who quit their jobs in 2021. Most were looking for more pay or flexibility (the ability to work from home is another decent hedge against rising energy prices):

At least half of these workers say that compared to their last job, they now earn more money (56%), have more opportunities for advancement (53%), have an easier time balancing work and family responsibilities (53%) and have more flexibility in their work. Choose the time in which they spend their working hours (50%).

Saving money always pays off but when prices go up, it becomes very difficult for many families to set aside money.

Earning more money is one of those things that no one teaches you how to do, but is probably your best bet for improving your standard of living in the long run.

I know putting an inflation hedge in your portfolio is the sexiest option but you have more control over your personal finances than the markets when it comes to fighting inflation.

In-depth reading:
Why housing is a good hedge against inflation

¹That’s when that extra freezer in the garage comes in handy.

²Lots of excitement in the air about the weekend plans.