This 1 Thing is Robbing You Every Single Day (Here's What to Do About It)
On Episode 19 we talked about The Get-a-Raise Calendar I Swear By (My Secret Weapon to Regular Pay Increases) and walked through the dates I planned around during my corporate career, and what I did on each of those dates, to increase my chance of successfully landing a raise each year.
One of the things we touched on was how I calculated my Target Number (the number I requested when I asked for my raise) and, a critical piece of the Target Number is considering what I needed to be (or, remain) comfortable. In other words, how much extra money did I need to maintain my current standard of living while accounting for inflation?
Maybe you're someone who's thinking you don't need a raise or regular raises because you already make plenty of money to cover your expenses, in which case, that's amazing! If that's you, that is the best-case scenario, however, even for you, I would argue that you should still be seeking a pay increase every single year at least to keep up with inflation.
WHAT IS INFLATION?
That brings us to today's conversation: I want to talk about what the heck is inflation – in normal human-speak – because, although we hear about inflation all the time in the media or when people raise their prices ‘due to inflation’, we don’t typically talk about what it truly is and why it happens. And I want to talk about what that means for you in your life, and what you can do about it.
According to investopedia.com, inflation is “a rise in prices, which can be translated to the decline in purchasing power over time or, in other words, that unit of currency (JT: so, let's say, the US dollar) effectively buys less than it did in prior periods.” That's one official definition of inflation, but let’s break that down and talk about what does that actually mean for you and your life?
Before we do that, I’d like to give you a simple example. So as you might know, I'm currently living in El Salvador, and as I record this episode, we're entering mango season. It's this magical time of year when you drive around and there are mangoes everywhere, spilling from the trees into the street (and there are ~50 different kinds or more). It’s wild. With that said, mangoes are on my mind, so my example is about mangoes.
INFLATION: A SIMPLE EXAMPLE
Let's pretend in the smallest country on Earth, there are a total of $100 shared among all of its inhabitants – so across the whole country, there are $100. Now, in this pretend country, the only thing that people exchange money for is mangoes – everything else is barter (I have a skill, you have a skill, and we trade… so, I teach you personal finance in exchange for you baking me bread; there’s no money exchanged except for mangoes).
In this pretend country, they produce 100 mangoes per year. That means $1 can buy you 1 mango. Everyone accepts that these are the rules by which they live in this pretend country until suddenly the people who are in charge decide, for whatever reason, to print $100 more. So now there are $200 spread across this country – but there are still only 100 mangoes.
That may not seem like a big deal in the grand scheme of things, but let's look at what that means for you if you want to go by your mangoes. As I said, now there are $200 instead of $100, so $200 spread across 100 mangoes means that instead of $1 buying you one mango, $1 now only buys you 1/2 of a mango. So if you want a full mango, you will now have to pay $2 instead of the $1 you paid before.
You don't love it, but those are the new rules… it’s only $1 more, right? So, you accept it and you move on… until, lo and behold, the people in charge decide that they’re going to print even more money: they’re going to print another $100. Now there are $300 spread across your country. There are still only 100 mangoes, which means that now your $1 can only buy you 1/3 of a mango. Can you see how this is going to become problematic?
The 1 mango you want to buy is going to start costing more and more money. And, again, because we're talking about a pretend country with such a small amount of money and only exchanging money for one type of good (mangoes), maybe it still doesn’t seem like that big of a deal. So let’s scale this out and look at what this might mean for us in the real world.
INFLATION: WHY YOU SHOULD CARE
What if I told you, effective immediately, your rent or mortgage payment Now only covers the next 2 weeks?
That is what inflation feels like.
In a nutshell, the central bank (also known as The Fed) controls how much money is printed, both literally and figuratively, which means it can create money out of thin air. There's something called the money printer where they literally print the paper money you carry in your wallet or get from the ATM, etc., or, more commonly, they simply add numbers to a screen increasing the "money" their member banks have in their overarching bank accounts. In both cases, they are creating new money which they inject into the economy.
This affects you because it changes the percentage of the money you hold. Let me explain.
Let’s go back to our pretend country. Let's say you're living in the pretend country and when there was only $100 across the entire country, you had $10. That means you held 10% of the money (or 10% of the “purchasing power”).
Now, remember how we went from $100 to $200? The second the bank printed more money – the moment that happened – your 10% became 5%. You still have the exact same amount of physical dollars, but they’re not worth as much anymore.
Again, you’ve got the same amount of money, but that money will now buy fewer things for you.
I don’t know what the total amount of US dollars are in circulation right now in the United States or the total amount of currency in other countries around the world (and, as we’re learning here, that amount is constantly changing because the banks keep printing more money), but I do know that I have a certain amount of those dollars, and you have a certain amount and that is a percentage of the total amount and every single time the government and/or the banks print more money, that percentage that you and I both hold – it goes down.
SEEK REGULAR RAISES TO OFFSET INFLATION
When more money is printed and the percentage you hold goes down, that makes it harder for us to buy the things that we normally buy, and it makes it harder for us to maintain our standard of living month to month, and year over year. And that’s why I firmly believe it's critically important that you are seeking a raise every single year if you work for an employer – or invest.
Let’s say you have an apartment, a car payment, and all of your bills and, this year, you're able to cover all of your costs. Well, you’ve probably heard that a lot of money has been printed since 2020, which means that the percentage of dollars that are yours has gone down – and every time you hear that more money is being printed, your percentage will continue to decline. That means you’re going to find you’re having a harder time paying for your apartment, car payment, and all your other bills… or, rather, that after you pay your bills and buy groceries and car fuel and go do your normal activities, you’ll end up with less left over to save or invest.
That’s why you need to get a raise at least as big as the current inflation rate. So whenever you're planning to ask for your raise, do an online search for “What is the current inflation rate?” and be sure you’re asking for a raise of at least that much simply to maintain your standard of living.
INVEST TO OFFSET INFLATION
Every time the Fed prints more money, it devalues your money and your life. Think about it: if you work for an employer, you're trading time of your life to go to work (5 days per week from 9a-5p, 50 weeks per year) in exchange for money. In other words, you’re trading time for money. So it’s even more serious when you consider it from this perspective because now you realize, every time the fed prints more money, it’s devaluing your life… your literal life energy.
The good news is that this is another reason investing is so powerful: investing is a way to make money without trading time for it.
When you invest – when you put your money into different assets like the stock market, real estate, or crypto, – you’re storing your money somewhere where it will (hopefully) grow faster than the rate of inflation… without you having to trade time for it. It’s a beautiful thing.
As an example, historically the stock market has performed (throughout its existence) at ~10%. Last I checked, inflation was around 7%. So that means, the stock market, historically over the long term across all the various stocks, has outperformed the (current) rate of inflation.
Inflation is something Cory and I talk about every time we’re considering making any kind of investment. We are always asking, “Is this (investment) going to outperform the inflation rate?” I think it’s something we should all be thinking about.
INVESTMENTS BASED ON USD
Something that’s becoming more difficult is that our (the US) government keeps printing more money and, in my opinion, inflation is becoming a bit out of control, so for the first time I feel concerned about investing solely in assets that are US dollar-based.
Don’t get me wrong: I love investing in the stock market. I talk a lot about fiduciaries and using them to get your money into the stock market quickly (especially as a new investor). We also invest in real estate, and all of our real estate investments are still through the US dollar (even though we're living in El Salvador, the currency here is USD – and Bitcoin, which we'll talk about in a moment).
But something I’m starting to consider longer-term and on a larger scale is: if they’re going to keep printing more US dollars and the purchasing power of every US dollar that I have is going to continue to go down (because I’ll continue to have a smaller and smaller percentage as they print more and more money), should I consider investing into assets that are not based in the US dollar?
This brings me to investing in deflationary assets.
BITCOIN: A DEFLATIONARY ASSET
One of the things that I’ve been wanting to talk more about on this platform is cryptocurrency – specifically Bitcoin because I don't know enough about crypto in general to have an opinion about the other cryptocurrencies, but I know enough about Bitcoin to share my thoughts at a high level. And I want to explain why Bitcoin is a deflationary asset.
As a result, Episode 21 is all about Bitcoin and, in it, I cover why I believe in it, the history of it, and why I think, for me, it’s a smart investment – and a big part of that is because the way it's designed makes it deflationary (unlike the US dollar, which is inflationary).
I cover everything you’d want to know as someone who is new to Bitcoin and, since we’re on the subject (and I mention this in Episode 21 as well), let me tell you the documentary I watched that really made the light bulb come on for me when it comes to Bitcoin: it's called The Rise and Rise of Bitcoin.
It’s a documentary on YouTube that’s well done – entertaining, easy to watch, and informative. I highly recommend watching it.
THE US DOLLAR: AN INFLATIONARY CURRENCY
The US dollar is inflationary which means you can just make more of it. Well, not you and I – if you and I printed US dollars, we’d go to prison, which is incredibly ironic. But the government and the bank – they can just print more money, which ultimately ends up benefiting them and the people closest to them the most, and ends up hurting those of us in the working class the most because it’s devaluing our time, our purchasing power, and our life’s energy.th
Imagine for a moment a scenario in which you save your entire life for retirement. You did all your calculations when you were 20-something years old, you figured out the amount of money you need to retire – the amount you need to survive for ~30 years (let’s call it $1M). Then you work hard your entire life to save up $1M, and you get to your retirement age of 65, and it dawns on you that $1M isn’t going to be enough because now everything is so much more expensive…
So you don’t get to retire. You must keep working.
That is very serious and exactly what we’re up against.
More so, it’s incredibly unfair and, unfortunately, there’s not a whole lot you can do about it… which is why I’m so adamant about doing the 2 things that are within your control, which are:
Seeking annual pay increases – don’t be afraid to switch employers, research shows that’s how people get the biggest pay bumps
Investing – even if you're investing in things based in the US-Dollar, that’s a good place to start; the worst thing you can do is not invest in anything; later, once you get the hang of it, you can look into investing in other kinds of assets, like Bitcoin for example
THE BIG PICTURE
Inflation is this awful sneaky robber that steals your life energy day in and day out, and it comes back to the banks printing more money.
I hate that we're in a system that puts us in these positions, but here's the good news: there are two things you can do to fight back:
Seek annual pay increases at least as much as the rate of inflation.
Strategically store your money in things that are returning at a rate higher than the rate of inflation [hint: storing your money in a bank isn’t going to cut it… you need to be investing]
NEXT STEPS
If you want more information on getting a raise, check out Episode 19: The Get-a-Raise Calendar I Swear By (My Secret Weapon to Regular Pay Increases). I also did a mini-series on getting a raise in Episodes 5, 6, and 7, so you can check those out as well.
And as far as investing to get ahead of inflation, I always come back to this: it starts with your budget.
Before you can invest, you must know how much it costs you to live for a month, and then build an Emergency Fund that is 3-6 times that amount. Once you’ve got your Emergency Fund, you can invest without fear.
Take action today to avoid losing more of your purchasing power and your life energy. The longer you wait, the more you'll have to work and the less you’ll get to live... and nobody wants that.
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