Inflation, Saving, and Investing
My dad used to tell me so many wonderful stories of how much something used to cost.
“I remember when they were selling oceanfront lots in Garden City for $100. And if it had a house on the lot, they would give you the house.”
“I used to deliver newspapers for a nickel a piece.”
Even I remember when gas was 59 cents a gallon.
When we look at our investments or bank account balances, we see numbers. Those numbers don’t often represent the same thing.
What do I mean?
$1 in 1980 use to buy a lot more than today. I remember I could get a hot dog, a pack of crackers (nabs in Southern speak), and a coke for a dollar at Zion Grocery. That was our staple lunch after cropping tobacco.
So, when you are looking at your statement and see numbers, think…
“What can this buy me today? What can this buy me in the future?”
Also consider a very important point, there are twin invisible thieves that rob you every month: taxes and inflation.
Below will give you some context on inflation.
Yes, sometimes things can become cheaper, especially in the areas of technology. Is that surprising? Do you remember how much you used to pay for long distance phone calls??
Back to inflation…
This chart shows us a range of products and services that have fluctuated in price since the turn of the century. The products in blueish colors have become more affordable or haven’t increased much. The products in reddish colors have had substantial increases (Higher than the overall average inflation rate).
If you had just saved for a house, or childcare, or college tuition, or healthcare, then you were running on a treadmill that was going faster than you could keep up with.
If you saved AND invested, those services may have stayed relatively affordable.
Investing may allow your money to grow, potentially outpacing inflation and potentially increasing in value over time.
So, saving helps facilitate preservation and short-term goals, and investing helps facilitate growth and long-term goals.
Risk vs Reward
The long-term average of a well-diversified portfolio is somewhere around an 8% annual return. If inflation averages less than that during the period you are invested, then your investments theoretically outpaced inflation. (Inflation generally floats between 1-5% depending which statistic is used.)
Some people may say: ‘I can get 5% in my savings account, so why would I risk it to try to get 8%?’ And on the surface, this argument seems very astute. In any given year, the difference between 8% and 5% will not be life changing. The difference occurs when you re-run that scenario over years or decades.
A 5% return is fine. In fact, $100,000 returning 5% per year for 25 years would hypothetically grow to $338,635
An 8% return is better. $100,000, returning 8% per year for 25 years, would hypothetically grow to $684,847.
That is slightly more than double.
Some people would still say: ‘338k is plenty. I don’t need to be greedy.’ But keep in mind, these are nominal returns, NOT inflation-adjusted.
The $100,000 in hypothetical earning 5% minus 3% inflation for 25 years = $164,060. (Real purchasing power, or today’s dollars)
Whereas that same 100k in hypothetical earning 8% minus 3% inflation for 25 years = $338,635. (Real purchasing power, or today’s dollars)
The longer your money is invested, the more you could benefit from compounding, making time your ally in helping to build wealth.
Balancing Saving and Investing
Of course, saving still plays an important role, especially for short-term goals and emergencies. Having an emergency fund—typically about six months of living expenses—in a savings account can provide security and peace of mind. But for long-term goals like retirement, children’s education, or significant future purchases, investing is key.
By integrating both saving and investing into your financial strategy, you can enjoy both worlds: the security of knowing you have funds for immediate needs and the growth potential that can help you achieve your long-term financial goals.
On the lighter side, Elliott completed his summer class of Macro Economics. He did well. We spent two weeks in Bulgaria in late July visiting by wife’s family. I read the book Soul of Wealth, by Dr. Daniel Cosby, I will be doing a podcast interview with him later this year. I also read Death in the Long Grass, by Peter Capstick.
Hope all is well with you and your family,
Jeremy,
Finger Financial Five – 5 points in 5 minutes or less – is to provide you with a weekly shot of useful financial information. My intention is to share principles so that you will have more clarity that help you make better financial decisions.
The information presented in this newsletter is the opinion of the writer and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources, but no liability is accepted for any inaccuracies. This is for information purposes only and should not be construed as an investment recommendation.
Past performance is not necessarily indicative of future results, and there is no assurance that the investment objective will be achieved or that the strategies employed will be successful. All investments involve risk and, unless otherwise stated, are not guaranteed.
The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
