If you have any inkling of a hope to plan multi-generationally with your money, and you don’t carefully consider the problem of inflation, well my friend… let’s just say your great great grandchildren are going to have really value the spiritual legacy you leave… because the dosh just ain’t gonna last.
In case you’re new around these parts, we are fans of the way that Abraham ran his home and his dough. You could say he did it like a Biblical boss, in fact. And Ol’ Abe had lots of thoughts that we’ve covered in this here blog, but today I want to shine some light on the way his unique view of assets and his multigenerational vision for wealth and inheritance actually speaks to a topic that is currently in the news. That topic is…
INFLATION.
Now you may be saying, “Regis, *I* haven’t heard anything about inflation in the news!” Fair enough, you don’t run in the financial nerd circles I do (Huh. “Nerd circles.”). But you HAVE heard about the TRILLIONS of dollars of stimulus that is being injected into the US economy by the high-powered Writers of Checks who give out dollars like they’re actually THERE to give. You may have gotten a check from the government, and you may be expecting another one any day now. In order to understand inflation, we need to understand where that money is coming from. Shall we?
Inflation can happen for a variety of reasons. When a population expands, they want more of the resources available to them, and more is needed to fill their collective maw. In the short term, that could mean food and entertainment, but in the long term prices tend to rise on things that are scarce and can’t be made abundant simply by producing more. Think about things like real estate, gold… and if you’re keen on the latest tech trends… Bitcoin. My favorite explanation for why gold tends to be inflation-proof is the statement that in the year 1790, a gold coin would buy you a nice custom suit and in the year 2021 a gold coin will buy you a nice custom suit. True story! Believe it!
So how does the government sending out checks cause prices to rise? Well the research is pretty clear that, in the short term, it doesn’t. But today we have a $27 trillion national debt, and $3 trillion national deficit. If you’ve ever read our take on budgeting, you know that we aren’t fans of any budget that results in you spending more than you make. When the US Government does this, they have a tendency to ‘pay’ for their spending by printing more money. (Sigh.) That increases the money supply, and unless taxes go waaaay up, prices rise as a result, since there’s more money in the system for the same amount of goods. That right there is inflation.
Whether inflation is caused by the latest round of indiscriminate government spending or simply by the natural forces of population growth and resource scarcity, you can bet that it’s going to continue over time. Prices always go up over time. Just gonna happen. A dollar is worth less than it was 100 years ago, and tomorrow’s dollars won’t go as far as today’s do. That’s just how it works.
Does anybody benefit from inflation, you muse on your long walks on the pier? Yup: the people who own the assets that grow in value benefit plenty (for an example, think of people who hold commercial real estate. Their rents will always rise, over time). So who gets hosed by inflation? Me and you and Joe Package: people who spend all their money to buy things that become worth less (or nothing) over time. Consumers pay the price of inflation.
Now that you’re smarted up on inflation, let’s talk Bible:
In Genesis 15, Abraham had a conversation with God about his assets. (Did you know that Abraham had financial planning meetings with the Almighty? You probably didn’t know that he did… but he did. So be like Abraham!) They didn’t talk about his retirement plan, or about Abe’s stacks of cash and how his cattle would “compound” over time to make him one of the richest guys on the planet. No, Abraham asked the LORD questions about his descendants 400 years in the future! We are a broken record on this topic, but Abraham thought waaaaaay out into the future when it came to his family and the resources that would be needed for them to fulfill their calling from God.
Let’s say you had a similar desire to think about your own descendants just 100 years in the future (even if you ended up ¼ of Abraham… you would end up a Biblical stud). And because we can’t say with certainty what the world will look like 100 years from now, let’s go BACK 100 years and imagine you were having this conversation with God in 1921 (Harding is president! Czechoslovakia is founded! The Babe holds the home run record!). Well if you had $100 back then, it was the spending equivalent of having $1,455 today. So let’s say you, like Abraham, wanted to fund future generations and invest your hypothetical $100 for their sake. Well, if you get less than about a 2.75% return, then those great great grandkids will, effectively, have less money than you initially invested for them! Conversely, the buying power of $100 today is the same as the buying power of $7 back in 1921.
The moral is this: don’t sit on your money. With interest rates as low as they are right now, even putting it into a savings account or CD is likely to cost you in the long run. Inflation will outpace those paltry interest rates: If inflation is 2.5% and your savings account returns 0.4%, then you’re “losing” 2.1% of your money every year. BOOOOOO.
How did our hero Abraham combat this inflationary problem, and end up funding the entire nation of Israel? I’ll tell you: He focused on assets that grow in value along with inflation instead of spending on things that decline in value. What a pre-Israeli genius. Genesis 23 says that he was making real estate deals with a guy named Ephron long before his family was to inherit their promised chunk of land. The cave he purchased actually became a family asset – it’s where he and a bunch of his kids are buried today.
Abraham also saw that, because his descendants would be numbered like the stars (that’s a lot of descendants), there was going to be need for a few more cattle (ok, a lot more cattle). So he became a successful entrepreneur. Some of his earnings were invested in precious metals, as we are told in Genesis 13:2, and the rest was likely used to continue investing in more assets and growing his business.
Believe it or not, we can employ some very similar strategies today in our quest to fund multigenerational visions and combat inflation:
- REAL ESTATE is historically a great asset to own long term, as it rises in value along with inflation, since people can’t create more of it (unless you’re Dutch). And of course there’s
- GOLD, (and other precious metals like silver) which are just pretty, useful substances that probably won’t be increasing in quantity much, making them a fine type of currency because they can’t be manipulated (at least, not in the way that I mentioned is wont to happen when governments use monetary policy to cure their debt woes). The case for
- CRYPTOcurrencies is that they are the same thing: a scarce resource that, because nobody can just decide to make more on a whim, should rise in price over time, assuming a constant or rising demand.
What you may not realize is that there’s one other hedge against inflation that Abe used, and many of us Abrahamic followers employ as well:
- BUSINESS OWNERSHIP is also a smart way to combat inflation. In my day job as a financial planner, we build portfolios for folks in all different stages of life. The classical wisdom is that as you get nearer to retirement, you would own less and less equities (usually publicly traded stock) and more and more “fixed income” products (think gov’t and corporate bonds, which pay the holder a predetermined amount monthly). This is because the value of stocks can bounce around a lot while, once you’ve purchased a bond, you’ve got your return locked in and can rely on that “fixed” income. This is all well and good if you’re aiming for the standard American dream: maximize your dollars available now for consumption and enjoyment and die pretty close to empty. This plan doesn’t work so well, however, if you’re thinking 400 years into the future like our boy Avram…
When I meet with a client who, like Abraham, thinks about forgoing some of the near term basking in wealth in order to fund a multigenerational family vision, I get pretty excited. While we still need to take care of basic needs for one lifetime, we can start to think about purchasing assets that will grow and outpace inflation with some or even a big majority of our available funds. That can mean a mix of business ownership (a private small business or equity in publicly traded companies), real estate and other assets like precious metals that protect against inflation. Those are all great foundations for a multi-generational investment portfolio.
I’m hoping you understand better, now, that inflation drives us to those conclusions. And though this may be new to us, it’s not new: Abraham knew.
To wrap up, I know you guys like the brass tacks of executable instruction, so I’m going to give you a 5 quick hits on how thinking multigenerationally should make you the type of guy who (at least) keeps an eye out for inflation:
- Sitting on too much cash is like giving away (at the moment) about 2% of whatever you’re holding each year. Don’t do it.
- While Real Estate often gets heralded as the ultimate anti-inflationary asset to hold (and don’t get me wrong, it’s great), don’t forget that business ownership is another form of equity that tends to grow in value as inflation impacts money.
- When you hear business ownership, don’t forget that this includes everything from your side hustle to shares of stock that you purchase. They can all be great hedges against inflation.
- Slight side note, but when you’re investing in stocks to protect against inflation in your long term portfolio, it’s best not to pick individual companies. Being well diversified by “owning the whole market” (a la super diversified index funds, for example) is the way to go.
- With a small portion of your assets, it’s worth asking your financial advisor or favorite trusted resource whether something like gold, silver or even cryptocurrency makes sense and aligns with your multigenerational vision.
Inflation has come, is here, and is coming, my boys, and we want you to be like Abraham, who prepared his multigenerational family by investing in assets that would grow over time, far outpacing the inevitable decline of the Caananite doubloon (suck it Caananites!). Take a note from the patriarch, think long term, and invest wisely!
*Mark Parrett is one of the founders of Abraham’s Wallet. When not blogging for you here, he’s raising a family in Salt Lake City, UT and working as a financial planner at Outpost Advisors.
