Editor's note: Originally published on April 28, 2014
Left unattended, the average American adult can gain 1-2 pounds per year. Hardly noticeable, right? Except that after just 7 years, that's a potentially 14 pound weight gain (and a pretty tight waistband!). Fortunately there are an abundance of books, articles, shows and classes designed to combat the gain.
Inflation is similar. It creeps up and before you know it, your grocery bill has gone from $145 per week to $180. Instead of spending eight dollars for a paperback, you're spending ten. The reality is that unless you learn how to beat it, you are going to be a victim of inflation.
Prices rise because of inflation. Inflation refers to the rise in prices for goods and services in the economy. This means that, with time, the value of your cash is worth a little bit less. So 10 dollars is worth more today than it will next year.
How can you beat inflation?
You need to grow your money by at least the rate of inflation in order to keep up with rising costs. This is where the stock market comes in handy. Over time, the stock market has proven to be the only accessible investment vehicle that provides the ability to grow your money.
But First! How fast do prices go up?
The last recorded inflation rate in the U.S. was at 3.9% in September, 2011. This means that if your groceries cost $500 last September, you would be paying about $520 this September for the exact same things. Now that you know you need to make at least 4% to beat inflation, check out the following tips to learn how to do it:
Beating Inflation Tip #1: Dividend Yield
The stock price is not the only way you can make enough money to beat rising prices. You can also rely on dividends to give you a return that is higher than the inflation rate. Dividends are quarterly payments made by companies to their shareholders (you). The payments will supplement the price changes.
How to Beat Inflation: Look at the Dividend Yield. This shows you what percentage of the stock price you will get back as a dividend payment. It's like looking at the interest rates on different savings account before putting your money into one.
Beating Inflation Tip #2: The smaller you are, the more room you have to grow
Historically, smaller companies perform better than larger companies. Why? Because smaller companies have more room to grow as they challenge the larger, more established companies. The Wall Street Journal reports that over the last ten years the S&P rose by 14.1%, but the S&P Small Cap 600 rose by 77%!
How can you try to get in on this growth in order to beat inflation? Sort through companies via their market caps on the stock screener and then trade a small cap stock.
(Remember, small cap companies have a market cap of $250 Million to $1 Billion, mid-caps have between $1 Billion and 5 Billion and large-caps are above $5 Billion.
Beating Inflation Tip #3: The golden rule
Pirates looted for it. Kingdoms conquered for it. And now, smart people invest in it. No matter where you go, gold is considered one of the safest investments in the world. It is also an investment that has historically beaten out inflation. For example, in the last 50 years, gold has increased by an average of 9.99% every year, but inflation has averaged 4.05% a year.
Expensive is relative
Keep in mind, the next time you hear someone say, "Wow, this has become so expensive", you know that that person isn't really talking about the cost, but rather their ability to keep up with the change in cost. Don't be on one of them!
To overcome rising pricing you can:
- Invest in dividend paying stocks
- Invest in small-cap stocks
- Invest in Gold