In my past couple of columns, we have discussed the first two out of four financial fallacies that will ruin your financial future. Fallacy No. 3 is: Not seeing inflation as your biggest financial problem.
Most people see taxes as their biggest financial obstacle. However, as we have discussed in past columns, inflation is your biggest financial challenge that each of us must overcome.
Inflation can destroy your chances of ever retiring if you do not take action today to overcome its incredible influence. Let me give you a simple example of the real impact of longterm inflation.
Fifty years ago, a candy bar cost a nickel; an ice cream cone cost 10 cents; and movie tickets were $1.25. Today, a candy bar costs $1.25 (25 times more); an ice cream cone costs $3 for one scoop (30 times more); and movie tickets are $13 in most major cities (an increase of 10 times). The reason I am using 50 years in this example is that this is the average number of years a person works in their lifetime. Therefore, look at the costs of these same items starting today for a 20 year old when he or she retires at age 70.
If things only stay the same and don’t get any worse, in another 50 years, it will cost $31.25 to buy a candy bar; $90 for an ice cream cone; and $130 to go to the movies. In addition, this is not projecting anything other than what has already occurred in the last 50 years. With over $20 trillion dollars in federal debt, inflation can easily get far worse.
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This is the reality of inflation. In planning for long-term financial goals, you need to be thinking in very large numbers that far exceed what most people think is rational. You will need much more money than you think if you want to have a large enough asset base at retirement to meet your needs, or have enough money set aside to pay for college educations.
Let us focus for a minute on the cost of college educations to get a better feel for how inflation is affecting that. According to investment management company Vanguard, the average costs for college in 18 years, including tuition, fees and room and board, will be $54,000 a year for a public school and $120,000 a year for private schools. That is almost $500,000 for 4 years of education at a private school and a quarter of a million dollars at for a public school per child. How many children or grandchildren do you plan to help?
The financially trained person realizes that inflation is the silent killer, and the only way to offset its incredible impact is through investing in assets that grow faster than inflation after taxes. If your investment can earn more than inflation, then they will completely neutralizes its negative impact. Therefore, start researching different investment areas to find those that grow because of inflation instead of lose money because of it.
If you wait to start your investment until later, it is like watching this whole ball game from the bleachers. Unfortunately, there is almost nothing you can do from there that can impact the game.
The financially trained person knows that if you are not actively playing the game, down there on the field in real time, you will most likely end up one of those statistics I referenced at the beginning of this series of columns.