Inflation and How It Can Make You Rich

So, in the previous post, we talked about how inflation makes you poor but now we’re going to have some fun. We're going to be talking about how inflation makes you rich.

To start, understand that inflation is one of the fundamental principles that wealthy people use and it's one of the major ways for people that have investments or that own anything in the economy make money. Inflation is how wealth is created and grown. By understanding this fundamental principle, you can start making inflation work in your favor and grow your wealth.

Now remember as we covered in the last article, inflation is when prices and services go up, the value of money goes down. That's why if you are a saver, you're guaranteed to lose money and it’s why holding money in a bank is a guaranteed way to lose approximately two to four percent a year. That’s inflation. It’s a constant player in any economy.

The government needs inflation to drive economic trends, so the government is targeting to create around 2.5 percent to 3 percent inflation rate. This way, they are guaranteeing that your money will lose at least the 2.5 percent. Take that over 10 years average to a 3% and you're guaranteed to lose 30% of your money. Now extrapolate that over 50 years to when you retire – It just doesn't work! The math doesn't work. That means you're going to have to make 30% more money every 10 years just to try to make up for the losses. That’s just to break even. You’re not even getting ahead. That is why savers are losers and why saving can never make you rich. It’s a hard pill to swallow, but a necessary one.

The good news about inflation is that it has the opposite effect for investors. Remember the price of goods and services drive up inflation and kills you on all sorts of ends. It makes you poor because you're holding money in a bank account. All your money is static in that bank account, but inflation is a constant player in any economy. So, your money is sitting in your bank account while inflation is working on the economy. Value drops and your money is worth less every year. Prices continue to rise. The cost of services and living expenses continue to rise, but the money that you put into your savings account becomes less valuable. It’s hard to keep up with inflation. You’re working hard, hoping for a pay raise and inflation is simply outpacing your paycheck. If you get a 3% raise at the end of the year, but inflation was 3.5% which means you didn't get ahead. You didn't even keep up with basic inflation because you lost 0.5 percent. How do we avoid this catastrophic toll on your bank account called inflation? It’s disheartening, but remember, although it's catastrophic on your bank account it is 100 percent necessary for the economy. Without inflation we get deflation. Deflation also means depression. We saw this in 2008 and on a greater scale during the Great Depression. Depression is what happens when the stock market, assets, and things that have value drop. Suddenly buying houses or getting services, anything that you wanted to buy drops in price which brings down the value of money. Then deflation skyrockets and it gets bad.

Therefore, the government wants a target inflation range – to fight this problem. You have all the smartest people in the world and all the governments in the world trying to get inflation to destroy the value of your money and there's a couple of reasons for that.

Number one is that if they lower inflation the government essentially has a magic wand that erases debt away. The more they can keep a gradual inflation, the more amount of debt they have. It's lowering that value more and more. Look at it this way, if the United States is worth $10 and they borrowed $10 on top of that, then in 10 years, suddenly the United States is worth $13. That increase in value is because of inflation. It's worth more now because there's a $3 spread. It's like they limit their debt. So, inflation means that values keep going up and their debt to value ratio gets smaller for the United States. The government absolutely needs the economy to have inflation.

Which brings us to the crux of this article. How can it work in your favor? How can inflation make you rich? Remember how the price of goods and services react to inflation. Now if you are working as prices go up, then taxes go up and value of money goes down. This is very important. The value of money drops, prices go up, taxes go up and this means your net worth is going down. Why do you think they say the middle class is shrinking? Because of this right here. This simple equation investors and wealthy people they flip this equation around.

What investors do is they use inflation and their investments to their advantage. Let's talk about real estate. I own a lot of real estate. That is my wealth vehicle, and it is how I create wealth. Now, with inflation, when I own real estate and my tenants are paying me $100 a month. In 15 years, they are now going to be paying me $300 a month or three times the initial value. What happens is that as my prices go up that is a net positive for me. That is no longer a negative. As prices go up, the debt that I used to buy mean my expenses go down just like the U.S. government because if I bought a building for $100 but rent triples then that means the value of that building is now tripled since my initial investment. But the money that i used to buy it didn't change. If I use $90 to buy it and I have 100 rentals worth $100 plus $90. That $90 is still the same, but because prices have gone up and suddenly this spread is working in my favor.

Prices in goods and services go up, my renters are now paying me more money, my assets inflate, and the government rewards me through taxes. My taxes go down because the government sees that I am investing in the economy. Congratulations! My taxes are lower and, although prices are going up this is a net positive rather than a negative for me. Because my taxes are now lower, that net positive is going up and because all assets increase in value as prices go up and your money is in the form of assets not cash, so those assets go up which is a plus for you. That's a huge net positive. You're basically taking the negatives right here, price in cash and turning them into positives because they work for you instead of against you. Then, your taxes get lowered and where you are a W-2 employee investment saving each one of these things are negative 13 – 3. You're going to get 3 times your investment. You’ve tripled that money as an investor. In a modern-day economy, you get 3 times the gains of a normal person saving money. 3 times! That's astronomical!

Therefore, investing is not even something that you're doing to get wealthy. People have to invest just to break even not to lose money so inflation can work for you, but you have to be a participant in the economy because as the economy grows at 3 percent, if you don't own the economy it will work against you. But if you own the economy and inflation works for you and makes you rich. If you are an owner of the economy, if you own the goods the services and the assets that our economy must use, then inflation is working for you. Those are just Golden Rules. In order to offset that you need to be able to invest. If you want to get good, then you take these tax returns and you take the cash flow you from your investments and put them to work.

Let's say you make a 10 percent cash flow from your investments. Then you re-invest that 10 percent back again and make another 10 percent on your previous 10 percent. Now you're doing something called compounding. You must think about this this as leverage and I'm not just talking about financial leverage. This is societal leverage. You are using the government to work on your behalf. You essentially have the full force of the U.S. dollar. Its governments, its army, its Navy are built to make you money. In a society, every individual that goes out and buys goods and services in the economy, all that economic activity is working to make you money. You get to leverage that and the more that you re-invest those returns, the faster you can compound it. And that’s just the tip of the iceberg. That doesn't include financial leverage where you can use banks or other people's money that's a whole step higher, which we’ll cover in another article. Just remember, the basic rule of thumb is inflation can make you poor or it can make you wealthy and if you re-invest your returns inflation can make you very, very wealthy.