“The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
– John Maynard Keynes
This post is about something that just about everyone is experiencing, but this post is for the next generation, and how they can avoid one of the mistakes nearly every adult makes. This is about not borrowing to fight inflation.
I recently received a notice of our utility bills increasing nearly 5% for 2017. The notice emphasized that they limit utility increases to less than 5% annually. This gives me the impression that they’d like to increase it more, but they are being kind to us by limiting it to 5%.
All of the grownups are ignoring real inflation and are supplementing their lifestyles by borrowing all the money they can. They are also doing everything they can to avoid looking at the math behind their lifestyles.
I don’t know too many people who’s income is increasing anywhere close to even four percent annually. How many of us know how much a five percent increase ads up to when compounded annually for ten years?
Let’s look at an example. Let’s say you were all grown up and earned $50,000 ten years ago. If you were to maintain the same lifestyle today while your costs were going up 5% yearly, do you know how much you’d need to be making today? Just to stay in the same place, be able to pay your inflating bills without taking any steps backwards in your lifestyle.
The answer is you’d need to be making just under $81,500.
But, this is definitely not what’s happening. Median income in the USA has fluctuated between $52,500 and $56,500 in the last decade. While some might be tempted to say that this is due to the 2008 mortgage crisis, let’s pull back some more.
Let’s say you made $50,000 twenty years ago. To keep up with true inflation, not adjusted by some magic factor, for things you actually need to purchase to live, you’d need to be making $132,665 today. This is not to live like a rock-star, this is what you need today to maintain the same lifestyle you did in 2005, assuming it’s 2015 now, which it’s not anymore.
Since the FRED Chart goes back to 1985, let’s guess how much someone getting by on $50,000 in 1985 would need to be earning today, just to maintain their lifestyle in 2015? The answer: $216,000.
That’s the power of compounded inflation that all the grownups are feeling but not understanding. Now of course it’s not exactly 5% each and every year. Sometimes it’s more, and sometimes less, but the effect is the same. The average grownups income is not growing anywhere near the CPI, let alone real inflation, which according to some economists has been closer to 9% some years.
Taking to the inflation calculator again, looking at the FRED chart we can see that median U.S. income has increased less than 1/2 a percent over the last 30 years. So when you get a utility bill that boasts about how they are limiting their increases to less than 5 percent, know this: It’s getting tougher.
You have two choices, one on the income side, the other on the spending side.
For income you will have to get creative in how you make money. Maybe you can AirBnB your extra room, or work with Uber. But none of these are long-term solutions. By long-term I mean something that would work for more than, say ten years. Over time more and more grownups are looking for ways to make up the difference between their wages and their living costs, resulting in less money being made with rentals of all types. Once we’re past the point were everything is for rent, then there’s no advantage left in it. That’s an economic law.
One day you’ll be a grown-up and you’ll need to focus hard on continually reducing how much you need to purchase to compensate for increases. For example, if you own a home you might want to invest in solar heat and electricity to offset increases in your utilities. Eventually you might be able to live virtually off-grid in the middle of your city. When you look for a house, look for one that has a lot of sun exposure. Fortunately sunlight is not diminishing in value with inflation.
For that reason, forget the flawed return on equity (ROI) models that the adults bought into hook-line-and-sinker. They were duped into thinking that it takes decades to recoup an investment in solar by using flawed assumptions. What’s the value of a $10,000 investment in solar if it knocks out a utility bill that increases 4.7% per year for 30 years? Do the math the grownups forgot how to do.
Look to take « off-grid” every cost that is increasing with inflation:
Electric (can you go PV?)
Heat (can you use solar heat collectors?)
Gasoline (can you charge your Nissan Leaf from your solar array?)
Water (what can you do to reduce use and are you allowed to capture and store rain in your area?)
Food (a greenhouse in the yard?)
Taxes (haha, no sorry you have to pay those everywhere and no matter what)
Speaking of taxes, you do have some choice over the community where you choose to pay your taxes. There are big differences between state and cities, so do your research.
To be fair, the reality is that inflation is hitting utilities hard too. Costs of materials and resources which utilities need to pay may be increasing more than 5% annually. The reality is that everyone is in the same boat, except for some that get lucky once in a while by speculating on resources, or choose to live more simply.