The Prosperity Protocol

Issue #11 – June 17, 2025

Editor’s Note: Welcome to the eleventh issue of The Prosperity Protocol!

Your responses to our investing basics issue have been incredible—so many of you have taken the leap and opened your first investment accounts. Seeing this community take concrete action toward building wealth is exactly why I started this newsletter.

This week, we're tackling a topic that affects every single financial decision you make, whether you realize it or not: Understanding Inflation and How to Protect Your Money. With recent inflation concerns making headlines and affecting everything from groceries to gas prices, understanding this invisible wealth destroyer—and how to defend against it—has never been more important.

The Silent Wealth Destroyer: Why Inflation Matters More Than You Think

Have you ever noticed how the same amount of money seems to buy less than it used to, even though the numbers in your bank account haven't changed?

That's inflation at work—the gradual increase in prices that quietly erodes your purchasing power over time. Most people think about inflation as an abstract economic concept, but it's actually one of the most practical financial challenges you'll face throughout your wealth-building journey.

I learned about inflation's real impact through watching my friend Jake's experience during his first job out of college in 2019. His starting salary felt pretty good at $45,000, and he was proud of his disciplined saving habits that put away $500 monthly in a savings account earning 0.5% interest. He thought he was being financially responsible.

Fast forward to 2022, and despite earning the same amount and saving the same $500 monthly, Jake realized his money was buying significantly less. His rent had increased 15%, groceries cost 20% more, and gas prices had nearly doubled. Meanwhile, his savings account was earning virtually nothing while losing purchasing power every single day.

That's when Jake understood the crucial difference between nominal returns (what your account statement shows) and real returns (what your money can actually buy). Even though his savings account balance was growing, because it wasn't growing faster than inflation, he was actually getting poorer.

Jake's experience taught me that understanding and protecting against inflation isn't just helpful—it's essential for anyone serious about building lasting wealth.

Your Inflation Protection Blueprint

Let's explore how inflation works and how to build defenses that protect and grow your purchasing power:

1. Understand How Inflation Really Affects Your Financial Life

Inflation impacts different aspects of your finances in different ways:

Your Daily Expenses:

• Housing costs: Rent and home prices typically rise with or above inflation

• Food and energy: Often experience higher-than-average inflation, especially during economic disruptions

• Services: Healthcare, education, and personal services frequently outpace general inflation

• Transportation: Vehicle costs, maintenance, and fuel can be highly volatile with inflation

Your Savings and Investments:

• Cash savings: Lose purchasing power if interest rates are below inflation

• Fixed-rate debt: Actually becomes cheaper to repay as dollars become less valuable

• Wages: May or may not keep pace with inflation, depending on your industry and negotiation

• Investment returns: Need to exceed inflation to provide real wealth growth

Historical Context:

• Average U.S. inflation: approximately 3% annually over the past century

• Recent years (2021-2024): 4-9% in many categories

• 1970s-1980s: Reached over 10% annually

• 2010s: Often below 2% annually

Lisa, a nurse who started tracking this carefully, shared her eye-opening discovery: "I calculated that my $20,000 emergency fund from 2020 had the purchasing power of only about $17,200 by 2024, even though the account balance had grown to $20,600 from interest. That 'loss' of nearly $3,000 in real value motivated me to completely rethink my savings strategy."

For Beginners: Start by tracking how inflation affects your personal expenses—many people underestimate its impact on their daily costs.

For Intermediates: Calculate the real return on your investments by subtracting inflation from your nominal returns to see if you're actually building wealth or just treading water.

2. Build an Inflation-Resistant Financial Foundation

Not all financial strategies handle inflation equally well:

Inflation-Resistant Assets:

• Stocks and stock funds: Companies can often raise prices with inflation, maintaining real value

• Real estate: Property values and rents typically rise with inflation over time

• Treasury Inflation-Protected Securities (TIPS): Government bonds that automatically adjust for inflation

• Commodities: Physical goods like gold, oil, and agricultural products often rise with inflation

• Variable-rate debt: Interest rates that adjust with inflation protect lenders and can benefit strategic borrowers

Inflation-Vulnerable Assets:

• Cash and low-yield savings: Lose purchasing power if interest rates don't match inflation

• Fixed-rate bonds: Become less valuable as inflation rises

• Fixed-rate CDs: Lock in returns that may not keep pace with rising prices

• Fixed annuities: Provide stable income that becomes worth less over time

Strategic Asset Allocation for Inflation Protection:

• Conservative approach: 60% stocks, 20% TIPS, 20% real estate (REITs)

• Moderate approach: 70% stocks, 15% international stocks, 10% TIPS, 5% commodities

• Aggressive approach: 80% stocks (including growth and international), 10% REITs, 10% alternative investments

Debt Strategy During Inflation:

• Fixed-rate debt becomes cheaper: Your mortgage payment stays the same while your income (hopefully) rises with inflation

• Variable-rate debt becomes more expensive: Credit card rates and adjustable mortgages become costlier

• Strategic borrowing: Some investors use low fixed-rate debt to buy inflation-resistant assets

Michael, who lived through the high inflation of the 1970s, shared his strategy: "I keep enough cash for 3-6 months of expenses in high-yield savings, but everything else goes into assets that can grow with inflation. My portfolio is heavy on stocks, I own rental real estate, and I even have some TIPS bonds. When inflation spiked recently, my real estate values and stock portfolio both grew while my fixed-rate mortgage became easier to pay."

For Beginners: Focus on reducing cash holdings beyond emergency needs and increasing exposure to stocks through low-cost index funds.

For Intermediates: Develop more sophisticated inflation hedges through REITs, TIPS, international investments, and potentially leveraging fixed-rate debt strategically.

3. Implement Dynamic Strategies That Adapt to Changing Inflation

Your inflation protection should evolve with economic conditions:

Monitoring Inflation Indicators:

• Consumer Price Index (CPI): Official government measure of price changes

• Producer Price Index (PPI): Shows inflation pressure in the supply chain

• Personal Consumption Expenditures (PCE): Federal Reserve's preferred inflation measure

• Treasury yield spreads: Difference between regular and inflation-protected bond yields shows market inflation expectations

Tactical Adjustments Based on Inflation Environment:

• Low inflation (0-2%): Focus on growth investments, can hold more cash

• Moderate inflation (2-4%): Balanced approach with inflation hedges

• High inflation (4%+): Emphasize real assets, reduce cash and fixed-income holdings

• Deflation (negative): Increase cash and high-quality bonds, reduce commodity exposure

Income Protection Strategies:

• Salary negotiations: Use inflation data to support raises that maintain purchasing power

• Side hustles: Develop income streams that can scale with inflation

• Skill development: Invest in capabilities that remain valuable regardless of economic conditions

• Business ownership: Businesses can often raise prices with inflation better than wages rise

Regular Strategy Reviews:

• Quarterly assessment: Review your portfolio's inflation protection

• Annual rebalancing: Adjust allocations based on inflation trends

• Life stage adjustments: Inflation protection needs change as you age

• Economic environment adaptation: Modify strategies based on current inflation regime

Amanda implemented a dynamic approach after experiencing inflation's impact: "I track the CPI monthly and adjust my investment contributions based on trends. When inflation was running hot, I increased my REIT allocation and reduced my bond holdings. As inflation moderated, I shifted back toward growth stocks. I also negotiated my freelance rates twice in 2023 to keep pace with rising costs."

For Beginners: Start with simple inflation tracking and gradually adjust your investment mix away from cash toward growth assets.

For Intermediates: Develop systematic approaches to monitor inflation trends and make tactical adjustments to your portfolio and income strategies.

Beyond the Basics: Advanced Inflation Protection Strategies

The "Barbell" Approach to Inflation Combine extremely safe assets (TIPS, high-yield savings) with high-growth assets (growth stocks, real estate) while avoiding the middle ground (regular bonds) that performs poorly during inflation.

International Diversification for Inflation Different countries experience inflation at different rates and times. International stocks and bonds can provide protection when U.S. inflation is particularly high.

Leveraged Real Estate Strategy Using fixed-rate mortgages to purchase real estate creates a situation where inflation helps pay down your debt while potentially increasing property values. This strategy requires careful analysis of cash flows and market conditions.

Commodity and Natural Resource Exposure Direct investment in commodities through ETFs or natural resource companies can provide inflation protection, though these investments can be volatile and should represent a small portfolio percentage.

Money Term Made Simple: Real vs. Nominal Returns

Nominal Return is the percentage your investment grows in actual dollar terms—what you see on your account statement.

Real Return is your nominal return minus inflation—what your investment actually gained in purchasing power.

For example:

• Your investment grows 8% (nominal return)

• Inflation is 3% that year

• Your real return is 5% (8% - 3%)

This distinction is crucial because only real returns represent actual wealth building. During periods of high inflation, investments with positive nominal returns can still lose purchasing power if they don't exceed the inflation rate.

When evaluating investment performance, always consider whether your returns are beating inflation. A 6% return during 2% inflation (4% real return) is actually better wealth building than a 10% return during 8% inflation (2% real return).

Your Questions, Answered

Question from Jordan M.: "I understand that inflation is bad for cash savings, but I'm nervous about putting my emergency fund into investments that could lose value. How do I balance inflation protection with keeping my emergency money safe?"

My take: This is such an important question, Jordan, and it highlights the challenge many people face between safety and purchasing power protection.

The key is creating a tiered emergency fund strategy that balances immediate access with inflation protection:

Tier 1 (1-2 months expenses): Ultimate Safety

• Keep in high-yield savings account (currently earning 3-5%)

• Purpose: True emergencies requiring immediate access

• Accept some inflation risk for maximum liquidity

Tier 2 (2-4 months expenses): Inflation-Adjusted Safety

• Consider Treasury I-Bonds (currently protecting against inflation)

• Or short-term TIPS (Treasury Inflation-Protected Securities)

• Purpose: Medium-term emergency needs where you can wait a few days to access funds

Tier 3 (Beyond 6 months expenses): Conservative Growth

• Conservative investment portfolio (maybe 40% stocks, 60% bonds)

• Purpose: Extended job loss or major life changes

• Accept modest short-term volatility for better long-term purchasing power protection

Alternative approach for those with stable employment:

• Keep 3 months expenses in high-yield savings

• Build investment accounts that could be accessed if needed but are primarily for long-term goals

• Rely on income replacement strategies (disability insurance, strong job market skills) rather than massive cash reserves

Remember: the biggest emergency fund risk isn't market volatility—it's inflation slowly eroding your financial safety net over time. A $30,000 emergency fund losing 3% purchasing power annually costs you $900 yearly in real value.

The "perfect" emergency fund balances immediate access for true emergencies with protection against the guaranteed erosion of inflation over time.

Tools That Make Inflation Protection Easier

Protecting against inflation requires tracking and smart allocation tools:

1. Treasury Direct – For I-Bonds and TIPS
Treasury Direct is the official U.S. government platform for purchasing inflation-protected securities like I-Bonds and TIPS directly. I-Bonds currently offer inflation protection with no fees, and you can purchase up to $10,000 annually. The platform is free to use and provides direct access to government inflation-protected investments.

2. Empower – For Real Return Analysis
Empower's free tools help you analyze your portfolio's real returns by tracking performance against inflation. Their fee analyzer also helps identify investments with expense ratios that could drag down your inflation-adjusted returns. The basic service is completely free and provides valuable insights into your inflation protection.

3. Vanguard Real Estate Index Fund (VNQ) – For Real Estate Exposure
VNQ provides broad exposure to real estate investment trusts (REITs), which historically perform well during inflationary periods. With an expense ratio of just 0.12% and exposure to over 160 real estate companies, it's an efficient way to add inflation protection to your portfolio through real estate without direct property ownership.

All three options help you build and monitor inflation-resistant investment strategies.

Three Things to Do This Week

1. Calculate your personal inflation rate by tracking how much your essential expenses (housing, food, transportation) have increased over the past year compared to official inflation figures.

2. Review your current asset allocation to determine what percentage of your wealth is in inflation-vulnerable assets (cash, fixed-rate bonds, CDs) versus inflation-resistant assets (stocks, real estate, TIPS).

3. Set up automatic tracking of key inflation indicators by bookmarking the Bureau of Labor Statistics CPI reports or setting up news alerts for inflation data releases.

Let's Keep the Conversation Going

Want more detailed strategies for inflation protection? Check out my Medium publication "Investor's Handbook" where I explore these topics in greater detail.

Visit My Medium Publication → Here

How has inflation affected your financial planning? Reply to this email with your experience—I'd love to feature reader strategies for dealing with rising costs in our next issue.

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Remember – inflation never sleeps, so your wealth protection strategies shouldn't either.

Until next week,
Todd

This newsletter is for educational purposes only and doesn't constitute financial advice. Always do your own research and talk to a qualified professional before making financial decisions.