We’ve all been hearing a lot about inflation recently. But what is inflation? Inflation is the rate of increase in prices over a given period of time.
And with inflation running hot right now, the rate at which prices are increasing has obviously been unusually high.
There are a lot of reasons behind inflation running hot, but that’s not the point of today’s article. Moreover, it’s always important to focus on what you can control. And you can’t control the inflation rate.
But you can control how you react to it. You have control over your entire lifestyle. Your lifestyle can be set up in a way that makes you practically bulletproof against inflation.
Today, I want to tell you about a major life hack that is the ultimate protection against inflation. Ready? Let’s dig in.
So what is this mysterious life hack? What makes you practically bulletproof against inflation? Before I give you the big secret, let’s break down the point of all of this.
My big financial goal in life was to achieve FIRE – that’s financial independence/retire early.
I focused relentlessly on this goal, which allowed me to go from below broke at age 27 to financially free at 33. As I’ve discussed in prior videos, I lived well below my means and plowed my savings into high-quality dividend growth stocks at appealing valuations. These are stocks that pay reliable, rising dividends.
My plan all along was to live off of the reliable, rising dividends the stocks in my portfolio produce for me, which meant I didn’t need a day job any longer. I treat these stocks as the golden geese that lay ever-more golden eggs. I don’t slaughter the geese by selling stock. Instead, I only take the growing pile of golden eggs, and I live off of that.
So once your passive dividend income is enough to cover your expenses, you have it made… right?
Well, kinda sorta. But then you have to factor in inflation, which is what this video is all about. If your expenses are, say, $2,500 per month this year, that’s one thing. But what will those expenses be in 2025, 2035, or 2045? A lot higher, I’m sure. That’s the nature of inflation acting as a rising tide lifting all boats.
Almost everything is getting more expensive over time, especially the big stuff that really hits the monthly budget – housing, food, transportation, healthcare, etc. Recent readings on annual inflation have it pegged at 6.8%, the highest since 1982. And that’s just looking at CPI, which a lot of people feel underestimate the real impact.
Well, dividend growth investing has inflation protection built right in.
That’s because, as I already stated, these are the golden geese laying ever-more golden eggs. The G in DGI stands for “growth”. This is all about growing dividends. See, high-quality dividend growth stocks represent equity in world-class businesses that produce reliable, rising profit and pay out reliable, rising dividends. So just like your expenses will be higher in five years, so will your dividend income. And because a lot of high-quality dividend growth stocks that we regularly feature here on the channel are growing their dividends even faster than inflation, that actually expands your purchasing power over time instead of only keeping it intact.
Dividend growth investing is a great life hack to protect against inflation in and of itself, but I’m going to pass along the real secret.
That’s right. I’m talking about taking dividend growth investing and combining it with an even more powerful life hack. If you take these two things together, you put yourself in a position of near-invincibility as it pertains to inflation.
The life hack I’m talking about is geographic arbitrage.
Yep. You relocate from a high COL area to a low COL area. You earn your money in a strong currency from a strong economy, and you spend in a weaker currency in a weaker economy. This can be done in many, many ways.
How I’ve done it is, I moved from the US to Thailand in 2017.
And guess what’s happened in the US since 2017? Costs have gone way up. Housing is a perfect example. According to a study by Zumper, median rent in the US has skyrocketed over the last year. Here’s a quote from Zumper on this: “It’s hard to overstate how dramatic rent growth has been in 2021. Through 11 months of the year, Zumper’s National Rent index shows the median one-bedroom rent up 12.1 percent, while two-bedrooms are up even more at 13.2 percent.” The crazy thing is, this is only the median. In some of most appealing US cities that draw people in because of aspects like opportunities, climate, and amenities, the rise in rent has been even more dramatic.
But wait, there’s more. It gets worse. This is just a growth rate. You also have to consider the base upon which the growth is occurring.
This is the crux of the issue, and this is why geographic arbitrage is so incredibly powerful in terms of protecting you from the ravages of inflation over the long run. People tend to focus only on the inflation rate, not the base upon which that growth is occurring. According to that same study by Zumper, most of the popular US cities have median rent prices on one-bedroom – I repeat one-bedroom – apartments at over $2,000 per month.
When you’re spending that much on rent already, the growth of that rent can kill your budget.
Think about it. A 10% increase in rent on a $2,000/month apartment just grew your expenses on rent by $200/month. It’s not just the relative growth rate to worry about. It’s the absolute increase in your expenditures that you have to pay attention to. And then you have to think about how this plays out over not just years but decades of your life.
Because this phenomenon – a high growth rate on an already-high base level of costs – is playing out across the US in almost all areas of your life. This isn’t just a rent thing, either. This is a food thing, a gas thing, a healthcare thing, etc. Plus, this is exponential. If that 10% increase continues into another year, it’s now a 10% increase on $2,200 in rent – which is now a $220 boost in monthly expenses. The problem compounds.
And this is where geographic arbitrage plays in.
I’ll give you a real-life example, using my own experience. My rent when I first moved to Thailand in 2017 was 14,000 baht per month. That’s roughly $415/month using the current exchange rate of about 33.4 baht per dollar, which is roughly the same as it was in 2017. My rent now? Nearly five years later? It’s 13,000 baht per month. That’s roughly $385/month. Yes. That’s right. My rent has gone down. And I have a nicer apartment than when I first got here, which I already showed you in a prior video. I didn’t have to downgrade my lifestyle. I upgraded it.
This is because Thailand’s economy is not nearly as robust as what the US is working with.
And with the pandemic wrecking tourism globally, Thailand, with 20% of its annual GDP previously reliant on tourism, has seen local prices on a lot of things stable or even decreasing. Indeed, the very apartment I now live in was 20,000 baht per month back in 2017. I’d know, because I toured it back then. It’s gone down in price because of local issues with the economy.
But when you’re earning in a strong foreign income – US dollars – those local issues – priced in Thai baht, in this case – aren’t disadvantageous for you; they’re advantageous. This isn’t only rent, either. The restaurants I frequent have barely budged their prices. The local coffee shop I go to every day is charging just five baht – that’s 15 cents – more for coffee than it was in 2017. My gym membership costs the same. Transportation is the same price. So on and so forth.
I’ve either seen costs go down or stay roughly the same over the last five years. And this low inflation rate is on a low cost base. If I were to replicate my exact lifestyle back in the States, it would cost me more than three times as much money. Thailand’s overall cost of living is less than 1/3 that of the States, on an apples-to-apples lifestyle basis.
But let’s run a hypothetical experiment for a moment and imagine that inflation was suddenly an issue here.
Let’s just pretend that my rent is going up by 10% per year like you’ve got going in many places in the US. Whereas a 10% increase on a $2,000/month apartment causes expenses to rise by $200/month, a 10% increase on a $385/month apartment would only cause expenses to rise by about $39/month. So what started out as a $1,615 difference in rent is now a $1,776 difference in rent.
You see how that works? It’s not just the rate on an apples-to-apples basis that matters. It’s the cost base upon which that growth rate is being applied. In this scenario, assuming equal inflation in both places, there’s no way that the cheaper apartment would ever catch up to the more expensive apartment in terms of what it costs per month.
The gap would only widen over time. Indeed, since I left the US in 2017, the delta in the costs on what I use and what I spend money on between the two countries has only grown. Thailand was much cheaper than the US in 2017. I noticed that right away. But the difference is even more stark in 2022, because of the higher inflation rate and the higher cost base in the US.
The truth, though, is that Thailand doesn’t just have lower prices but also lower inflation. That’s a win-win!
According to Statista, the inflation rate in Thailand, since 2017, has been in a low-single-digit range. So moving from the US to Thailand wouldn’t just significantly lower one’s costs on an apples-to-apples lifestyle basis, but they’d also benefit from a lower annual rate of increase in those lower costs. It’s like a goldilocks scenario.
On top of all of that, if you’re invested in high-quality dividend growth stocks, your passive dividend income should be growing at a rate that vastly exceeds the local inflation rate, which causes your purchasing power to exponentially rise over time.
I’ve seen this happen firsthand. While my expenses are roughly the same as they were in 2017, my passive dividend income is substantially higher – thanks largely to the fact that the companies I’m invested in continue to reliably increase their dividends, year in and year out, like clockwork. My dividend income is organically growing at a high-single-digit rate every year, even while local expenses barely move up.
However, you don’t have to move to Thailand to take advantage of the geographic arbitrage life hack. You don’t even have to move abroad at all.
You can accomplish some of the benefits – though not as extreme – by moving from a high COL area in your own country – say, the US – to a low COL area in the same country. Doing this internationally is preferred. And I’d argue it’s the technically correct way to do it. But it’s not completely necessary. For instance, the median rent in Miami is well over $2,000/month right now.
But in Omaha, Nebraska, it’s around $850/month. In addition, the growth rate of that rent in Omaha on a YOY basis has not been nearly as high as what you’ve currently got going on in Miami. And a lot of other things in Omaha are undoubtedly cheaper than they are in Miami.
Plus, you’d live in the same city as Warren Buffett. He’s worth $100 billion and can live anywhere he wants. Omaha can’t be all that bad.
Now, personally, I’ve been to Omaha, and I just think the overall lifestyle in Thailand is better, which includes a much warmer climate. And even compared to Omaha, which is a low COL city by US standards, Thailand is still way, way cheaper. But one doesn’t have to move to Thailand, or even outside of the US, to gain some of the benefits of geographic arbitrage.
You could move from almost any big coastal US city to almost any smaller interior US city and cement long-term inflation protection by lowering your cost base upon which inflation is being applied and also likely experience a lower local inflation rate than what some of those more popular cities are suffering through.
While the most recent national inflation rate reading came in at nearly 7%, that’s not evenly applied across the entire US. And let me be clear, the definition of moving abroad isn’t moving to Thailand. I’ve been using Thailand as an example because that’s where I went and where I have personal experience with. But one could substitute dozens of countries here. Take your pick. Depends on what you want out of a place – like food, climate, local culture, infrastructure, amenities, cost of living, etc. The world is your oyster.
As I’ve said many times, one of the best things about being financially independent is being geographically independent.
If you achieve financial independence and you’re able to live off of passive income, you can live anywhere in the world – so long as your income can cover your expenses in those places. The major binding force that tends to tether someone to one physical place is a job. But when you no longer have a job, you’re free to go anywhere you want. With technology being what it is these days, it’s never been easier to physically live in one place while still being “virtually” attached in some way to another place.
You can stay in touch with friends and family from far away with chats and video calls. There are now virtual mailboxes. It’s possible to run one’s businesses, investments, and banking completely online. You don’t have to be physically present in one place to do certain things in that place.
Dividend growth investing has a powerful inflation hedge built right in. But geographic arbitrage is the ultimate protection against inflation. Combining the two makes you almost bulletproof over the long run.
We continue to make video after video highlighting high-quality dividend growth stocks to consider for long-term investment. From there, it’s just a matter of taking action on your part. You have to save, invest, and build the portfolio. After that, you’ll want to seriously think about executing geographic arbitrage in order to make sure your purchasing power steadily increases over time and puts you in control of your entire lifestyle.
— Jason Fieber
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.We’re Putting $2,000 / Month into These Stocks
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