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  • This dollar bill has a DISEASE.

  • It might seem healthy, but if you look real close, you'll see a virus that is slowly

  • but surely eating away it's purchasing power every day.

  • This particular virus is named inflation, and every dollar in your bank account is infected with it.

  • If you've ever taken a high school economics class, you've probably already heard the term.

  • But most of us only know that it's the reason one day we'll tell our grandkidsBack

  • in my day, Macbook Pro's only cost one bitcoin”!

  • But inflation isn't just some benign force.

  • It's why getting a raise is so important, why the cost of education is spiraling out of control

  • and in extreme examples, it's affecting millions of people's ability to put food

  • on the table.

  • And it's something you need to learn how to live alongside without letting it sideline

  • your financial goals!

  • Now, inflation wouldn't be such a big deal if everything inflated at the exact same rate.

  • Who cares if housing prices skyrocketed if your salary instantly compensated to match.

  • The problem arises because different things inflate at different rates and sometimes for

  • completely different reasons.

  • There are two main types.

  • The first is cost-push inflation.

  • This is when companies are forced to raise prices because the cost of the materials to

  • make the thing or provide the service has gone up.

  • For example, did you happen to notice how vanilla ice cream is getting more expensive?

  • Madagascar, the world's largest supplier, has been consistently hit with terrible storms

  • that have been destroying the delicate crop.

  • So if the companies relying on vanilla want to keep their profit margins the same, they

  • will have to consider pushing that increased cost onto their customers in the form of a

  • higher price.

  • Which they can get away with to a certain point, assuming the economy is healthy enough

  • for it to not affect demand too dramatically.

  • Then there's demand-pull inflation.

  • Take our hometown Austin.

  • It's a rapidly growing city but the supply of housing hasn't been able to match the

  • demand.

  • Meaning landlords and people selling their homes are in the position to ask for higher

  • prices than they did the year before.

  • While both of these examples aren't super fun on our wallet, inflation is in many scenarios

  • related to growth.

  • When an economy is growing, the overall demand for goods goes up.

  • Conversely, when the economy isn't going well inflation tends to decrease because there's

  • not enough demand to support a price increase.

  • But, like a virus, if inflation is allowed to run rampant, really really bad things can happen.

  • Take Venezuela.

  • Corruption combined with economic mismanagement and an authoritarian government has led to

  • a humanitarian crisis of epic proportions.

  • The hyperinflation is so bad that the government refuses to share any official numbers, so

  • Bloomberg createdthe Cafe Con Leche indexmeasuring the price of a cup of coffee in

  • eastern Caracas.

  • In March of 2018 that cup of coffee cost 1.2 Bolivars and just one year later, that same

  • cup cost 2,800 bolivars.

  • It's no wonder that at nearly a third of the population has left the country.

  • So, whose job is it to make sure that doesn't happen?

  • Here in the US it's the Federal Reserve.

  • The Fed, is the bank of banks and its job is essentially to walk a tightrope between

  • encouraging the economy to grow, aka, allowing prices to rise, but at the same time, keeping

  • inflation from gaining too much ground and taking away the purchasing power of its citizens.

  • The Fed tries to fight inflation in three different ways: Setting the interest rate

  • that banks borrow money from them, adjusting how much cash banks are required to have on

  • hand, and deciding how much new money can be printed.

  • These methods control how much money is floating around the economy.

  • The more money floating around, the more liberal banks feel about lending it out, so interest

  • rates go down.

  • Which means it's easier for people like you and me to get a mortgage, a credit card,

  • a student or small business loan, and the economy grows.

  • But if it grows too fast, prices will go up faster than wages can keep paceand your

  • savings are suddenly worth a lot less.

  • That money you set aside for a Hawaiian vacation will now only get you as far as San Antonio.

  • There's no question that regulating inflation on macro-economic level is massively complicated.

  • Thankfully, Unless you're current Federal Reserve Chairman Jerome Powell, you don't

  • have any control over it.

  • But on the micro-economic level it's your job to inoculate yourself.

  • And guess what, there's only one vaccine out there, investing.

  • Most people know they should investbut why?

  • Why can't you simply save your way into wealth?

  • I think it's time to

  • Run the numbers!

  • This is Tricia.

  • She feels sort of scared of the stock market and travels a lot so she doesn't feel like

  • owning real estate for the foreseeable future.

  • What if she wanted to try and save money into a checking account to get to her personal

  • retirement goal of 850,000 dollars?

  • If inflation didn't exist, it would be pretty simple algebra.

  • If she started saving at 30 and wanted to retire at 65 that would require her to save

  • $2,023 per month in order to hit her nest egg goal.

  • A challenging number to hit even for higher earners.

  • But the reality with inflation is way worse.

  • The Fed's goal is to keep inflation at around 2 percent per year.

  • So let's say that actually happens.

  • That means in order to keep the same purchasing power of 850,000 in the future, her new goal

  • will have to be adjusted to almost 1.7 million dollars.

  • That would require her to set aside double the money or the equivalent of $4,047 per month.

  • Yikes!

  • But if Tricia decided to educate herself a bit and move past her investing fears, she

  • could harness the same forces that created the inflation in the first place to her benefit.

  • If she decided to invest her way to retirement through some stock-based mutual funds with

  • an average return of 8% per year, she could still hit that 1.6 million dollar goal, by

  • only saving $822/month.

  • Ok, while that's not chump change, that sounds WAY more realistic than four grand

  • a month!

  • It's also important for Tricia to keep a close eye on her income.

  • If it doesn't increase to keep pace with inflation, she's essentially making less

  • money every year, even if her salary stays the same.

  • So instead of seeing inflation as an evil virus, let's think of it like another invisible

  • powerful force, the wind.

  • You can choose to work against it or hoist a sail and let the forces at play work on

  • your behalf.

  • And that's our two cents!

  • Thanks to our patrons for keeping Two Cents financially healthy.

  • Click the link in the description if you'd like to support us on Patreon.

  • Have you noticed the effect of inflation in your life?

  • Tell us about it in the comments.

This dollar bill has a DISEASE.

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何かがあなたのお金を食べている! (Something's Eating Your Money!)

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    Capalu Yang に公開 2021 年 01 月 14 日
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