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LEARN ABOUT: Investing During Inflation
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Inflation is a steady increase in prices of goods and services in an economy. It is a common phenomenon that can wreak havoc for those who are not well-informed. When you borrow money with an interest rate below inflation, inflation doesn’t have to be your enemy. In fact, it can work in your favor, provided that you invest in the right place.
Here’s how inflation can be advantageous to you:
Lower real value of the debt
Let’s say you borrowed $10,000 at an interest rate of 5%, and the rate of inflation is 2%. Each year, your debt grows with interest, but the value of your debt decreases in real terms due to inflation. This means that the value of the debt is worth less than what you borrowed. Even though you are still obligated to repay $10,000, the real value of the debt is less.
More disposable income
When the rate of inflation is lower than the rate of interest, you get to keep more of your disposable income. Inflation doesn’t increase your debt. Instead, it reduces the purchasing power of your money. Consequently, you have more money to save or invest.
Investing in inflation-protected securities
Investing in bonds and other securities that are inflation-protected can mitigate the effect of inflation. These securities adjust their returns based on the rate of inflation. They provide a hedge against inflation. Investors who borrow at a low-interest rate can invest in such securities and make a profit despite inflation.
Investing in real estate
Real estate investments can also mitigate the effect of inflation on your finances. Real estate prices usually increase with inflation, and investing in it can provide a good hedge. Real estate investments can also generate rental income, which can cover the cost of borrowing.
Taking on debt always comes with its risks, and inflation is one of them. However, if you borrow with a low-interest rate and make smart investment decisions, inflation can work to your advantage. Inflation can lower the real value of your debt, increase your disposable income, and provide opportunities for profitable investments.
Are you using this concept yet?