Inflation and Mustaches

[kelvin]

Some news outlets and financial bloggers believe that inflation may show up under the current POTUS.

http://money.cnn.com/2016/12/12/investing/donald-trump-bonds-inflation-fed/

What is the proper response to inflation, from an investor's standpoint? Move everything into gold?

Personally, I'm a recent graduate with some student debt, no CC or other debt, no assets to speak of. How will inflation affect my debt? Will it make my debts easier or harder to pay off?

[vivophoenix]

I will address the part about your debts.

IF they are fixed rate, it will make them easier, and if your wage rises.

usually, people get raises each year, in response to inflation( can not speak for everyone).
so that means that monthly payment, although it numerically stays the same through out inflation, its value is less

For example:

you owe $100 a month in 2017
you make $50,000/year
but inflation rises 10% in one year.

the next year(2018) you will still owe $100 a month
but you now earn $50, 500/year, that is 5 extra payments towards that debt, and you did nothing different in 2018.

usually to purchase the item or service you got in 2017, it costs 10% more in 2018.  if it wasn't something frivolous it may be an item or service that is not worth more dollars.

[vivophoenix]

now for your investor question

gold is not a bet against inflation

but proper investments should outpace inflation. If you get the average S&P return of 8% /year, and inflation occurs at about 3%. you still will earn 5% profit.


Also, all of the math done by MMM takes inflation into account. the 4% drawdown rule,  assumes a loss to inflation and also attempts to preserve principal.

[TreesBikesLove]

The best hedge against inflation is to continue working. As a recent grad who will be working for another decade or so, you should be working during this period anyway. Whether or not inflation happens doesn't matter as long as your job is stable and they give you COLA that match or exceed inflation.

For someone who is already retired or very close to retirement, I do not know a good solution other than trust the 4% rule like it's God's word or find some enjoyable part-time work.

[kelvin]

vivophoenix - my debts are variable rate. The expensive one is $7600 at prime + 3%, the cheaper one is government student loans (in Ontario), $15000 at prime. The government is really flexible about payback terms, they're tied directly to my income on my tax statements. I'll be able to pay that one back as slowly as I like. I might see if I can get the expensive one rolled into something fixed rate now, while the rates are low. Thanks!

shaybro - I currently have a three month contract in my field and a ton of feelers out looking for more work. I'm looking into freelancing on the side to help with the pay gaps between contracts and to build my resume.