Beating Inflation & Asset Classes.

Welcome back. Hopefully, we now have a good grasp on the concept of inflation, how banks operate, and why continually over time, we all lose money in the form of purchasing power. We should also now have an understanding of the potential dangers of savings and checking accounts, and why we may not want to use them (except for certain specific purposes, which we will touch on later). So what now? Where does one go from here? This is the most important question of your financial life and the principal question we will be answering in this book. This book will teach you how to beat inflation by owning assets.

What is an asset? An asset is any item that buyers and sellers exchange between one another in a free, open market. Look around you and think about the things you use during your daily routine. Try to identify some assets in your life. A car may be an asset, a home is an asset, and those Jordan’s on your shelf are definitely an asset as well. How about the cash in your wallet? That’s another one. Or the instrument you played in middle school that you still own for some reason. All assets could theoretically be sold in an open marketplace for a fair price to a willing buyer. That is the great thing about assets – their ability to be bought and sold wherever, whenever. We could go into much more detail about the “sellability” of assets but we can leave that for higher finance. The bottom line is that the more sellable an item, the more liquid it is considered. Liquidity is the ease at which money changes hands for an asset in the open marketplace. Different assets have different levels of liquidity, starting with cash. Cash and the money on your debit or credit card are the most liquid form of assets. Anytime and anywhere, anyone in the United States will accept cash to purchase an item. It is the baseline, as everyone knows how much it is worth. Your parent’s house, on the other hand, will be less liquid. You would have to list it for sale, hire movers, hire a realtor, and go through multiple different legal processes. The same could be said for a car, a boat – even a plane.

There’s a distinct advantage to owning the house, an advantage that makes it more appealing than cash in the long run. A house is what is known as an appreciating asset, as, over time, its value rises based on factors like location, size, condition, and so on. The important thing about the house is that unlike your morning coffee or Spotify subscription, you expect to be able to sell it in the future, hopefully for more than you paid for it. This is what is called an investment, and investment is the major key to beating inflation and making sure your money stays protected from price increases. In most cases, investments are made in appreciating assets – ones you expect to increase in value over time. The opposite of this is called a depreciating asset. Depreciating assets will – you guessed it – lose their value over time. Common examples of depreciating assets are cars, cash, and anything you expect to use. This may sound like a bad deal – why would anybody buy a car then? Well, the car will take you to work, where you will be able to make more money. The car will also provide the benefit of mobility, allowing you to go to accomplish other tasks that keep you happy and healthy.

It is, however, very important to make the distinction between the car and the house. It is said that new cars lose between 10-20% of their value the second they are driven off the lot. That 10-20% is called the depreciation and it adds up continuously over the years you use the car, for reasons like the number of miles driven, maintenance problems, and newly released models of the car. Just like a house gains value for multiple reasons, a car loses value for multiple reasons. Rarely do these roles switch. We want to own the most appreciating assets and the least depreciating ones. This, in theory, will set us up for beating inflation. So let’s take a closer look at different types of assets – how liquid they may be, and how much we could reasonably expect them to go up over time (their return).