The Real Cost of Money

Too many people pay too little attention to the effects of inflation. We are lulled into a false sense of security by commentators talking about our current low inflation environment.

We forget however, that this years cost increases are added to last years, and so forth. The compounding effect of inflation is very scary over longer periods of time.

Can you remember how much you paid for fuel in 1980? Does around 35 cents a litre ring a bell? What about electricity and water?

Sure the current low inflation rates are much lower than the 8-9% we endured during the 80’s, but it’s all relevant. In the 80’s there were times when you could earn 12% from bank accounts, now 2% is a great return on cash.

And its cash investments that suffer the most from the effects of inflation.

A tax payer paying 32.5% marginal tax with money invested in a bank account earning 2% interest makes a whopping ZERO return after taking into account inflation at just over 1%.

Tax payers in higher tax brackets are even worse off, actually losing money by investing in cash.

Growth assets such as shares and property however, provide a hedge against inflation, with returns increasing over time to combat rising costs. That’s why they are called growth assets, because despite being volatile they grow at a faster rate than rising costs over the long term.

Hence investors should use cash investments for their short term needs, and growth assets such as shares and property to remain financially secure into the future.

If the next 20 years is anything like the last 20 years, you are going to need to triple your income to maintain your current standard of living.

What plans have you made to triple your income over the next 20 years?