Over the last 40 years in the US inflation has averaged about 2.9% per year. That means every year, your dollar buys 2.9% less stuff then it did the previous year. Over 24 years, that means your dollar only buys HALF as much stuff. Under the mattress isn’t a good place for cash. Even if it doesn’t get stolen, inflation steals a little bit every year. A savings account isn’t a good idea either. They’re paying less than 1% right now. Your cash in a savings account is still withering away to inflation.
Gold is ok… over the history of the modern economy, it about keeps up with inflation. A gold bar 100 years ago buys about the same amount of stuff as that gold bar today. Real estate is about the same. (Although your primary home comes with significant costs while investment real estate can come with significant income!)
But there’s good news. You know all those companies that keep increasing the prices of their goods and services? And keep generating profits and growing every year? If you put your money in THEM, you hedge against inflation. Those increased prices and profits directly transfer wealth to the owners of the stock. Prices go up? Stock share price goes up. Owners of that stock win. You want to be an owner.
And you can own ALL the stock in a convenient package: Our hero, the humble index fund. Buying and holding index funds not only generates profits, but also protects you from inflation. Any money you don’t plan to spend in the next five years should be invested, so it can grow and outpace inflation!
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.