In this newsletter we are going to provide a brief market update followed by an in depth conversation around the impact of inflation across your life using the 4 Pillars of Wealth.

The stock markets were generally up in May 2021 with the exception of the US tech heavy NASDAQ. Bonds were also up driving interest rates and yields down a bit with longer term maturities feeling the bigger benefit.

Financials and energy seemed to be the biggest recipients of the continued reopening trade in the S&P 500 sectors.

The TSX returned 3.26% while the industrial focused US Dow Jones returned closer to 2.1% and the slightly tech heavier S&P 500 returned 0.55%. I am continuing to look for value amongst the reopening trade for new ideas in the portfolios.

What is Inflation?
Inflation is the measure of price increases over time. The more inflation we get, the more expensive things get. Is it a positive or negative when we get wage inflation? That raise you get most years is a form of inflation. It feels like expenses increase faster than incomes and that’s why it’s important to own assets to increase your wealth. What about inflation on the impact of debt? If your income is increasing but your mortgage payment stays the same and the amount of debt you have is being repaid over time, does a higher amount of wage inflation help?

Inflation can be a very valuable tool if you know how to use it correctly.

The 4 Pillars of Wealth
The 4 Pillars of Wealth are a derivation of hundreds of conversations I had with my clients. It’s been developed with decades of experience. This is a simple way to take a complex life problem and dissect it into its components.

The 4 Pillars of Wealth introduce four main categories of building a solid financial empire. Without any one of these pillars and your empire will crumble eventually, being exposed to a number of risks and leaving you with little time to rebuild.

The 4 Pillars of Wealth consist of Making Money, Keeping Money, Growing Money and Protecting Money.

Making Money is your ability to earn and income. The greater the income the more flexibility we have with our lives. Having more income gives us the ability to have more options to choose from.

Keeping Money is about your ability to keep the money you earn. The person that keeps 5% of a $100k paycheck is worse off than someone who keeps 20% of a $50k paycheck in terms of their ability to fund and grow their net worth. A portion of this is also about examining taxes to see how they can be minimized and putting in mechanisms to keep more of what you make.

Growing Money is about using the money that you have to make more money. There are a number of great ways to accomplish this that fit your personality, expertise and lifestyle however if you don’t keep the money you make then you won’t have anything to grow. The more you keep, the more you have to grow. Most people come to me because they want to grow their money faster. While I certainly aim to do that, the next question that they come to understand is that their ability to keep money is probably the single biggest factor in growing wealth, particularly in the early days.

Protecting your money is about protecting your income, assets and family and lifestyle from unforeseen events. What protective mechanisms can you put in place to shelter you from market, legal and business risk. Many people think that errors and omissions insurance are enough to protect them when in fact it is often not enough. One simple example is what happens if someone you sell and deliver product to goes bankrupt and doesn’t pay you. You still have to pay for the supplies, services and wages that you used to make that product. Or perhaps you get in a car accident and get sued. Your insurance may cover all of the lawsuit however they very well might not and may go after your personal assets. What legal structures, insurance policies and other methods can be used to set you up for the best outcome in a very unfortunate situation.

Inflation & Make Money
Inflation can be very beneficial from a make money perspective. In times of inflation, labour gets tight and employers are willing to pay more for talent. This might be a time to jump ship and make a move to a new company. Sometimes companies try to keep their employees and offer small wage increases as an incentive to stay. They know that the employee would rather keep things easy and perhaps stay in a pension plan. This creates a very desirable environment for the employee to stay however it may not be the best financially.

If you’re going to ask for a raise then be sure to bring the heat. Make sure that you have a list of factual items that you’ve accomplished and/or created in your role. Talk about the numerical details or perhaps customer satisfaction. Perhaps it’s deadlines that you hit or made the best of a situation that was going sideways.

If you approach your manager at year end and they provide a 5% increase in pay however if you went to a new company would they pay your 10% to 15% more? It might be worth going to market on this.
Either way, I always recommend taking courses to improve your skills and stay current. This is particularly important for the older employee who has been in the workforce for a long time. Never stop learning and growing. This will keep you fresh and marketable. It also shows a passion for improvement.

Second, always keep networking. At least once a month grab a coffee with an old colleague or someone in the industry that you would like to work for. Always keep networking in case a downsizing situation arises, then you will have enough good relationships and contacts to reach out to in case you’re in need of employment.

Should you want to jump ship, you’ll be current, relevant and well connected. That’s a winning recipe.

Inflation & Keep Money
In a rising price environment, we are likely doing better as an economy. You may be receiving more money because of a pay raise. It is important to capitalise on this and see how much of the money that you earn can be retained. You could ask yourself, what’s my net margin? Are you only saving 5% of what you earn pretax? Would you invest in a company that only has a 5% margin? Probably not.

Products that you buy are likely getting more expensive. You may also have the desire to spend more money because you’re making more money.

I would suggest doing a self audit of your bank account and credit card statements for a month. Review what you spent, remember what you bought and ask yourself: “did I really need this?”. If not, then cut the recurring expense or change your habits for next month.

The more you can keep, the faster you can grow your wealth. This is likely the single biggest factor to creating wealth. The more you can keep, the more you can put to work and have money make more money.

Inflation & Grow Money
Inflation can be very beneficial to some asset prices. Stock markets, real estate and many other investments tend to rise in price alongside higher inflationary periods. For example a government trying to stimulate inflation will lower interest rates which drives up the value of stocks and real estate. The lower interest rates makes borrowing for companies and individuals cheaper and therefore they can both afford more debt which allows them to buy more assets which creates more competition for the assets and ultimately drives up prices.

There is a fine line between inflation that helps asset values and one that drives down asset values. A government that is trying to slow down inflation will increase interest rates. Too fast and too many interest rate increases can crash the economy however there are long periods of higher expected inflation that will be very beneficial to owning assets.

The point is that with the inflation that we’ve seen, we’ve seen home prices across the world increase at record paces and the stock market continues to drive higher. These are important aspects of increasing wealth.

Make more money, so you can keep more of it and use that money to buy assets that will increase in value. The more you can do this, the more wealth you will have and the more financial freedom and flexibility you will have.

Inflation & Protect Money
Inflation is a time when your assets and incomes should be growing. This will cause a risk rebalancing. You should review your income to see if your old insurance policies cover off what you need them to cover. Have you grown your income and need new tax efficiencies? This risk rebalancing is a great time to review your income, assets, debt and insurance to see what is appropriate. Perhaps you’ve reached a point where you are “self insured” for what you want to accomplish.

There are two aspects to protecting money. The first is to protect the income that you’re making. This is both while you’re here in case you become disabled or get a critical illness and also in case you pass away so that you can protect the impact that you would have had on your family if you were to be here. The amount of income, time and energy that you would have given to your family matters in a massive way and provisions should be made to protect that so that your family can continue to succeed even if you aren’t here.

The other aspect is protecting what you have through legal structures, tax efficiencies and insurance sheltering. Are you in business? Then you should strongly consider incorporating if you haven’t already and do a legal review to see if it’s appropriate. If you’re incorporated, do you have a holding company to shelter assets? Do you have investments, even in an RRSP, then you should do a review to see if it’s appropriate that you move them to segregated funds which provide creditor protection in most cases. Do you have methods set up that can accomplish both an income protection strategy in case of a critical illness or death but also provide tax efficiency?

One of the important things to take away from this video is that inflation can be both good and bad. What really matters is how you play it and how you use it to your advantage. This is the economy and you either ride the economic waves or you get crushed by them.

Let’s rise and ride our way to the financial future that we desire!

Until next time,

Trevor Dale