Rising Inflation Is Wrecking Your Wealth

There is a vast and interesting array of different ways you can lose your money while trying to get rich. Popular examples include things like investing in unsellable timeshares and blowing money on courses by fake gurus promising get-rich-quick schemes. Crypto adds to the list with unusual and attention-grabbing headlines like “Half a Billion in Bitcoin, Lost in the Dump”, and famous scams like the recent “Squid Game Crypto Rug Pull”. However, inflation is NOT very interesting. It is in fact inherently boring, and it is with boring efficiency that it works to annihilate your wealth, like a silent assassin coming for your savings.

Now inflation might take your savings, but it is equally important for anyone just starting to build wealth. Inflation doesn’t mind if you’re making money, saving money or losing money, it will come for whatever money you have. For years I ignored people that tried to talk to me about inflation, finding it an uninteresting topic and not yet understanding how it impacted me personally. 

To the uninitiated, investing can seem just like gambling. Money appears to be made or lost almost at random, with very little that can be done about it either way. With this as your mindset it can start to seem like a good idea to just save your money and stash it in a bank account or even under your mattress, ready for use when you need it (like after you retire). However, just because the number of dollars you own doesn’t change over a given period of time, this doesn’t mean you’re not actually losing money. And it might just be a lot of money. In the same way that $100 today doesn’t have the same buying power as $100 did in 1922, your money is actually becoming worth less and less with each passing year. “Tell me something I didn’t know”, I hear you heckle from the back of the audience, and I appreciate your point. If this exchange wasn’t happening in my imagination, I would tell you that it doesn’t need 100 years for you to lose an unacceptable percentage of your savings.

Let’s use an example, where you start with $100,000 in the bank at the start of 2020, and through avoiding risk and being careful with your money, you succeed in keeping $100,000 in your bank account ten years later, at the start of 2030. You are pleased with this result. However, in reality you have lost money, or at least that money has lost a considerable amount of buying power.

Even if you accept the idea that a dollar in the future won’t be worth the same as a dollar today, it can be difficult to know how much the difference is. Apologies for labouring the point here, but you are losing money if your bank balance does not grow at the same rate or at a higher rate than inflation. What even is inflation anyway?

“Okay, so how much is inflation?”, you ask. Officially, annual inflation in the US in November 2021 was 6.8%, which the same source states is “the highest since June of 1982”. We’ll use 6.8% as the current official inflation figure.

There are people that question the official inflation figure and claim it is actually much higher than that. For a different opinion, let’s look at how house prices in the US have changed in the last year. Zillow currently lists a 19.3% one-year increase between November 2020 and November 2021 in average US home values. The assumption here is that house prices are correlated with inflation, as Investopedia supports, but that doesn’t necessarily mean there is a 1:1 relationship. For argument’s sake though, let’s use 19.3% as the current house price inflation figure.

Just in case you’re not suitably shocked by that — if this rate of increase continues then house prices will have doubled 4 years from now!

Perhaps you think house prices going up are nothing to worry about, as they “always go up”. Do they really need to though? For people with houses this might not be so bad, but what about people who don’t own property? Let’s leave house prices to one side for now and look at our third and final perspective on inflation, which is to do with how many US dollars have been printed since 2020. Have a look at the graph below, which is apparently straight from the Federal Reserve. It does not need expert graph reading skills to notice that something very out of the ordinary happened in 2020:

The effects of this will probably take a while to reach the average person, but specifically mentions savings and retirement money being devalued.

Here’s that money printing statistic again, but in words, not in a graph:

80% of all US dollars in existence were printed in the last 22 months (from $4 trillion in January 2020 to $20 trillion in October 2021)

As a figure, we’ll use 80% as the amount that the USD has been devalued since January 2020. This won’t be used as an annual inflation figure, but as the amount the USD was theoretically devalued between January 2020 and October 2021. We could optimistically assume this was a one-off thing and won’t keep happening at the same rate, although one year earlier the headline was “40% of US dollars in existence were printed in the last 12 months”, so draw your own conclusions… Back to the main point, now we have a range of three figures for inflation from three different angles, namely:

Current official annual inflation figure: 6.8%

Current annual house price inflation figure: 19.3%

USD currency devaluation between January 2020 and October 2021: 80%.

While the number of dollars showing in your bank account will have stayed the same from 2020 to 2030 ($100,000), the buying power of those dollars will be a lot less in 2030. Let’s use the three different figures for inflation we listed above. In January 2030 your dollars would have the following amount of buying power, adjusted for inflation and displayed as equivalent to those sweet, sweet 2020 dollars you used to have so many of.

Using the current official annual inflation figure of 6.8%: Your $100,000 from 2020 would be worth $49,450 in 2030.

Using the current annual house price inflation figure of 19.3%: Your $100,000 from 2020 would be worth only $11,715 in 2030.

Using the USD currency devaluation since Jan 2020 of 80%: Your $100,000 from 2020 would be worth only $20,000, and not in 2030, but by the end of 2021 already…! Who knows what it would be worth by 2030.

This might take a minute to register, as these are some shocking numbers. Looking at the figures above, if things continue as they are, then your BEST CASE SCENARIO in ten years is losing over half of your buying power. This also means that even if you DOUBLED YOUR MONEY in those ten years, you wouldn’t even be breaking even in terms of buying power! And that is the best case scenario using current official inflation figures!

The results from the other two inflation figures are considerably worse, where you lose the vast majority of your savings (in terms of buying power) in ten short years, even though you thought you were being smart with your money.

It is not immediately obvious just how devastating a figure like 6.8% inflation actually is, unless you work it out for a period of several years in a row, which may be why the problem goes unnoticed by many people. Also, that figure of 6.8% doesn’t include house price increases, so there is reason to believe the real inflation number is actually higher than that. Also, this is for a ten-year period. If you carry those calculations forward up to 30 years or more then the money almost disappears entirely. If you’re wondering what that would look like:

Maybe you think inflation numbers are not really that high and the figures are all wrong. If we use an annual inflation number of 5%, then $100,000 turns into $21,463 in thirty years. Even if you are an eternal optimist and think inflation is only 2%, then your $100,000 still drops to only $54,548 in thirty years, just over half with extremely optimistic inflation figures which are considerably lower than the current official figures. This makes for sobering reading but there is a solution, and that is to grow your money at a rate that at least matches inflation, whatever that may be.

If we take this lowest and most optimistic figure of 2% inflation and apply it to a different example, we can see that even 2% a year results in large changes over time. Imagine you have found a way to keep your house at a perfect 68°F/20°C all year round, but this temperature increases by 2% a year. After 30 years it would be 97°F/36°C in there and you presumably no longer want to live there. If the temperature increases by 6.8% per year then it would be 291°F/144°C after 30 years and you could no longer survive inside your former home.

My personal solution is to avoid building wealth in USD-based assets vulnerable to inflation and government money printing.

How I do this is by investing in crypto.