With thicker bonuses and inflation at a 40-year high, lifestyle inflation creep is hotter than ever. No matter how correlated the wage-price spiral may appear, demand is out of control and most Americans cannot survive like this.
Although higher wages are still ticking up, I wonder how high they will go until headwinds from all corners halt it to a stop. These fears include recessionary predictions, supply chain shortages due to harsh lockdowns in China, the Ukrainian Russian crisis havoc on commodity prices, and most consequentially on the markets the harshest monetary policy tightening in 22 years.
Itâs prudent for us all to be vigilant with our savings and investments, especially retirees and those working at private or public startups and overvalued unicorns. A slew of companies from Robinhood to Uber are engaging in cost-cutting measures which tend to always begin from the bottom up. If thereâs ever a time to tap into your networks or stay diversified, it is before the unexpected happens because we all know it is coming somewhere.
Sadly with the national savings rate back down from 20% at its ultimate record high in late 2020, Americans are now saving at the pitifully low rates that they used to at around 4%, forgetting t0 plan for the worst and hope for the best during the best times to provide a buffer. If youâve been an investor, parent or alive long enough you should know by now nothing lasts forever and whatâs certain is uncertainty no matter how wealthy or healthy you are.
Buckling up and putting on your oxygen mask first are imperative for a smooth landing from the Fed and yourself, especially if you are counting on inflation to bump up your salary even more or artificially pay down debt.
Hide From Yourself
One of the most dangerous influences can be ourselves, especially when our emotions go hand-in-hand with our decisions.
As Bezos often proclaims, sticking to your first instincts and heart are much more prudent and reliable long-term because feelings arenât great predictors of the future, just of the boiling point in the present moment.
As a result, hiding my own paycheck from myself has been one of the greatest tricks of the personal finance world Iâve adopted that has saved me more than I can imagine. It isnât just the savings component that counts, itâs the compounding and constant reinvestment of interest and earnings that makes a huge difference in the long run.
Typical Americans tend to rely on their W2 paychecks to support themselves and tap into their investments whenever they need funding. They tie their emotions too strongly to their decisions within the market and in their personal lives digging a deeper hole for themselves.
Simply reinvesting and immediately divesting your paycheck into your savings, investment account(s), and maxing out your retirement account for a full match from your employer are the simplest secrets to being able to live comfortably knowing that whatever you have left is allocated to spend. Plus down the road, you will thank yourself for reinvesting your hard-earned earnings instead of purchasing that Birkin bag. Think long-term and save yourself from yourself long-term.
Thereâs a key difference between being poorly rich and really wealthy. You can interchange the terms to say wealthy poor or really rich, whatever suits you as long as you know that relying on a paycheck to end up giving more of it away the more you earn is never a healthy recipe. Rely on yourself instead and depreciate expenses as the asset appreciates through some kind of business model.
Lifestyle Inflation Creep
As we transition into an endemic, real life is getting hot and expensive. From climate change to inflation, this planet is boiling hot.
I might not need to remind you but Iâll do it anyway for you to stay healthy and safe. Stay vigilant and keep your distance these days. Luckily, airlines now have a break with fewer unruly passengers thanks to the lift on masks but that doesnât mean they arenât crunched with immense demand for summer travel, leisure, hospitality, and everything that was shut-down during the pandemic. Ticketmaster sales for LiveNation events are booming, movie theaters beat pre-pandemic sales, resorts are packed, and at-home stocks such as Netflix, Zoom, Shopify, Peloton, and Robinhood have gotten slaughtered and flipped with their polar opposites that exist in the real world such as Disney, Hilton, and Delta to name a few.
The decumulation phase is starting to settle in for those who are taking advantage of their inflated assets that soared over the past 2 years thanks to the immense fiscal and monetary stimulus pumped into the economy. On the housing side, Baby Boomers who have the greatest equity in their homes benefited the most from the tight housing market and are now looking to spend it while they can as life is getting back to normal, but at a more costly price.
And for the rest of us earners, whether you are part of Generation X or Generation Z as I am, these temporary deals before rate hikes cause ripple effects on the economy may be tempting to get into and snag if youâve been searching for your ultimate starter home or first crypto coin at the dip. Yet itâs important to realize the consequences and hefty costs that come with it in the long run. Thereâs no such thing as a sale right now so ask yourself if youâre willing to pay these frothy prices compared to later and if you will still be financially stable if things take a turn after the purchase as well.
Although higher mortgages rates and prices are already showing slower demand for housing, supply is still limited. In this case, it is best to wait a few months within the housing market since the Fedâs tightening cycles will take some time to cool it down.
With real estate as one of my favorite asset classes for its scarcity value, inflationary hedge, generational wealth perks, good savings practices, tax advantages, and depreciation perks, it is still up in the double digits this year and expected to outpace other asset classes that are more risky.
Sabotage Makeover
As earnings go up, its natural expenses would as well but donât be tempted to buy an asset because it is trading or listed at a discount. This is one of the reasons why six-figure earners deceit themselves. They are overly audacious with their bets and clearly allocate more than 10% of their net worth into one asset. Most my age are beyond risk-aggressive and eager to join the FIRE movement in 5 years and live lavish lives documenting the 1% of it online.
Iâm here to tell you thereâs nothing more dangerous than relying on only your juicy inflated paycheck, not net-worth or alternative passive income sources and assets to support you. In order to live comfortably and have a rainy day fund of 6â12 months of emergency expenses to cover living expenses, hiding your paycheck and focusing on something bigger than yourself is your best bet.
Boomers
Baby Boomers are a great example to illustrate how building wealth takes a lifetime for most. There are always a handful who got lucky with the Amazons and Appleâs but the majority predicted wrong. Though it doesnât mean their portfolios are down over time.Â
The wealthiest elders did not only stay diversified all their lives, but they also didnât have to take incredibly leveraged concentrated positions either because they stayed the course and knew that focusing on their net worth allocation and balance was more prudent than the title of the job and salary. Buffet stayed vigilant, conservative, and simply understood where his money was working for him not betting against it.
Understand your time horizon, cash flow needs, and risk tolerance to be able to support yourself no matter what. Ask yourself why you are putting yourself in a more dangerous position than you need to be in?
Since itâs easier to spend than save and also earn a top 20%+ income, reassess your needs before you sabotage yourself and your future.
We really need less than we think. Far too many Americans fall into the trap of buying things they donât need with money they donât have for people they donât like or know. Be someone who doesnât focus on the number and instead on the value and future ROI.
After all, not just during these times but every time, itâs not what you earn but rather what you save that counts.