I don’t believe in saving money. In my experience, you want to take money and put it into assets that rise with inflation, with my favorite being rental properties. The rents tenants pay rise with inflation, and over time, this is a winning situation for your money. This is why inflation helps the wealthy who own assets and hurts people who rely on a job to make money. Saving money isn’t good over the long term, because it will lose its purchasing power due to inflation. However, that doesn’t mean it isn’t good to save money in the short term. In times like these, cash is king.
Inflation vs. Deflation
Two things can be true at the same time. Right now, we have massive inflation that the Federal Reserve is trying to cool through raising interest rates. However, this inflation is mainly hitting everyday goods, so money that is being used for gas, groceries, rent, etc. is going to be losing purchasing power month after month due to this six percent inflation.
However, this is where is gets confusing because when investors who are saving for assets hear about this inflation, they assume their money, too, is being eaten away. Yet, if you dig deeper, you will see certain parts of the economy are deflating. Cars, real estate and stocks are all beginning to fall in value. This is predominately due to rising interest rates, but these rising rates are meant to cool the economy, which takes these larger purchases off the table for a lot of people. Hence, this lowers the prices even further. I believe we are just at the start of this asset price deflation as inflation just came in at six percent in March, and the Fed really needs to get that under control for the average person to be able to financially survive.
Patience is a Skill
In times like these where you have falling asset prices, patience is important. I see a lot of investors who believe the money they have in savings is burning a hole in their pocket. They are desperate to either buy something or give it to a syndicator. This panic mentality is not good for investing money.
Purchases should only be made by verifying the income a property produces minus expenses, with that total being net positive. It should never come from panic that inflation is eating away your savings. When you buy something in a panic without adhering to these cash flow fundamentals, that is when buyer regret will take place and where mistakes are made. To be clear, this doesn’t mean I don’t think you should be looking for real estate deals. At MC Companies, we are always looking for cash-flowing real estate. We just buy based on the cash flow of the deal, not based on wanting to off-load cash.
The lesson is, if you have money sitting in your savings account, practice patience through this downturn and remember, when times get hard, cash is king. We are in the third or fourth inning of a nine-inning game, and as the game progresses, there will be more buying opportunities that fundamentally make sense.