The Truth About Investing: Back to Basics
The Truth About Investing: Back to Basics
Inflation: Your Consistent Variable - Welcome to Season 3!
Season 3?! About time! Welcome back to the next season where we finally get to start looking at what to do next. The first season was all about a large part of the 'why' we invest. The second was about the framework of being able to begin. Now the third season will be the factors to consider for getting started and more of the 'how' to take a more active part in investing.
Thank you again for continuing to follow us and support us! We are looking forward to getting into more concepts and getting to go over them with everyone so you feel like taking investing into your own hands, is more attainable.
Wait, no, I got it. One,
Sean Cooper:two,
Chris Holling:buckle my shoe.
Sean Cooper:Three,
Chris Holling:four.
Sean Cooper:Shut the door.
Chris Holling:Yay. I'm a little teapot Short and stout.
Sean Cooper:This is where we end it.
Chris Holling:Oh, come on. Here is my handle here is my spout. When I get steamed up, hear me shout, shake it to me baby. let it all hang out.
Sean Cooper:That really took a turn.
Chris Holling:Much like any time you're hanging out with me.
Sean Cooper:That is a fair point.
Chris Holling:Okay, I promise I think so far. Welcome to season three. Can you believe it or not? In the truth about investing back to basics. My name is Chris Holling.
Sean Cooper:And I'm Sean Cooper.
Chris Holling:And we are coming back to you in in the in the new. What am I trying to say? We're we're carving a new path. The the first season was all about a lot of reasons why we talked about health care and health insurance and a lot of the long term benefits of investing in things that are going to come up later in life and why why investing is important for the long haul. The second season was about trying to get that framework and that foundation started so that you have all your ducks in a row in order to be able to start financing, financing, investing, investing, saving money in order to do stuff with numbers. Yeah. How do you like that's the professional term. And, and then this third season is we want to talk about some of the actual processes of investing itself. And we do need to address a couple of things first, and that's why today we want to touch on inflation. Because that's something that is a product that happens over time while you are investing and it's got some factors to consider along the way and kind of moving forward. I'm kind of excited in a weird, twisted way that everyone's just kind of along the ride with me as they kind of have been before but especially so now because now we've we've veered out of the personal finance and day to day realm that I'm comfortable with. And now it's it's just gonna be me completely lost and talking to Sean and say, I don't get it. So yeah, Sean, what was inflation? What? What, what why do we care about inflation? What what is what is inflation?
Sean Cooper:I'll definitely tell you why. why you should care about inflation, but I fully expected you to have some kind of internet definition of inflation pulled up.
Chris Holling:Oh, wait, no, I've got one
Sean Cooper:Where were you on that one.
Chris Holling:I've got one hang on
Sean Cooper:You do okay.
Chris Holling:I'm gonna, I'm about to, but here's how I'm going to do it. Urban Dictionary. Inflation definition. Okay, here we go.
Sean Cooper:Not even Wikipedia, but urban dictionary. And maybe after this, we can give them like an investopedia definition I think that might
Chris Holling:this is not part of the podcast.
Sean Cooper:Oh, boy.
Chris Holling:Well, here's, here's what I'm gonna do. I'm gonna tell it to you right now. And we're gonna clip it. And then I'm only gonna keep the reaction
Sean Cooper:Jeez.
Chris Holling:And then if somebody decides to research it on their own time, that's their problem. Inflation base.
Sean Cooper:Those are both horrendous, especially the first one.
Chris Holling:Oh, Urban Dictionary, you cruel, cruel invention. Well, if you if you do that on your own time, that's that's your choice, and I am not condoning it in any stretch right now.
Sean Cooper:Yeah, why don't we try the Keynesian definition?
Chris Holling:Keynesian. Do you have that handy?
Sean Cooper:investopedia. No you grab that you grab that
Chris Holling:Inflation definition in envy invasion, the investopedia you good with that
Sean Cooper:investopedia. That's good. Yeah, I was thinking John Maynard Keynes. Now,
Chris Holling:I'm gonna try and say it in a very professional voice now that we've completely declined within the first three minutes or so.
Sean Cooper:declined, I think we like, dug a whole, yeah
Chris Holling:inflation is the decline of purchasing power of a given currency over time, a quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services and an economy over some period of time. The rise in the general level of prices, often expressed a percentage means that a unit of currency effectively buys less than it did in prior periods.
Sean Cooper:Fantastic podcast over.
Chris Holling:Yeah. Now I only have one question. Yeah. Sean, what?
Sean Cooper:I thought that definition was great.
Chris Holling:It was to say this, this definition could have been in numbers, and I would have understood it equally well. And maybe it maybe it's because I was throwing on a weird voice and not paying attention.
Sean Cooper:I will talk about numbers later, though,
Chris Holling:I don't doubt any of that. You tell me. Tell me, talk to me about what that definition means to you.
Sean Cooper:Okay. So basically, what it was saying is that over time, the price of goods, everything that we purchase on a day to day basis, goes up. net, now, it doesn't always go up, there are periods of deflation, Japan has experienced that for an extended period of time. But for the most part, the price of goods goes up over time. That's why you know, decades ago, you could buy fuel for a quarter for a gallon instead of two to $3 or$3.50 a gallon. That is inflation, the price of your your general goods going up what it was talking about in terms of measuring it is typically you take a basket of goods designed to represent the average person's purchases on an annual basis. So you're going to factor in things like house car, food, you know, a number of different items in the food category, clothing, all sorts of different things. And you look at that basket of goods and the prices of those goods in one year. And then you look at that same basket in that price of goods The following year, or at least that's how it's technically supposed to be done. This is typically done and measured with the CPI, which is the consumer price index. So if you track the consumer price index, that's how they measure inflation on an annual basis. Now, that has been altered a number of times over the years. You know, it's it's always been a basket of goods, but the way they measure it, or the version of the CPI that they they use to quote and measure inflation has actually changed over time.
Chris Holling:Okay, well, and I think that's, that's a pretty fair, fair way to describe all that. And so you've got the the numbers, the cost of goods, in theory, I mean, like, you know, a car that was $2,000 years ago, is going to be $40,000. Now, and that's, that's the idea of inflation. And, you know, there's
Sean Cooper:right, and we're not necessarily talking about the same car, because then it would get old and probably would have depreciated. But yes,
Chris Holling:right. Yeah. But like
Sean Cooper:a new roughly equivalent car, right.
Chris Holling:Yeah, brand new car. Right. And I think I think with your description, and that is kind of an idea is a good overall explanation definition of it. And maybe maybe this this is opening a can of worms, and maybe not is inflation, something that is a naturally occurring process just strictly by you know, we get new parts for the car. So you're putting new alloys and new different things into it, and that's why it becomes more expensive, or is it created on a on a larger scheme level? From from a bureaucratic standpoint, does it does it naturally occur? And it's a combination of the two or where, why does inflation happen? We get what it is and we get it is happening, but why does it happen?
Sean Cooper:Yeah, so part of it is now occurring, but it also, I mean, again, that goes into how you measure it. So you talked about the alteration of goods over time. So as things enhanced new products are developed, it becomes a matter of is this alternate this better product, The same thing, and can the increased price associated with the improvements in that product be associated with inflation, or with the the change in the good itself. So, I mean, if I'm buying bread, you know, white bread that hasn't changed a whole lot over time, except they probably added quite a few more preservatives. Depending on where you're buying it. Yeah, if you're fresh bakery, then probably not. But you know, if you're going to the grocery store and buying in a plastic bag, more preservatives a side note. Anyway, the point is, some goods haven't changed a whole lot. So it's very easy to measure inflation with those. And inflation associated with those, I would argue is mostly bureaucratically generated, there are some costs that go into it, that could potentially cause rises in inflation, you know, the, those goods have to be shipped and transported to you. The methods of packaging may have changed. But all the different costs that go into actually getting it to you can in fact, impact the price. So whether that's the cost of the truck, or the train, that's getting it to you or the fuel that's being used to drive that truck can impact it. And that can be more of natural inflation. But I would say a lot of it is more bureaucratically created, politically created.
Chris Holling:Okay. And so what why, why why make anything more expensive? Why can't my bread be 50 cents a loaf? Like it once was? sometime? However, many years ago, that was, I think,
Sean Cooper:ah, why can't it be?
Chris Holling:Yeah. Why? Why does inflation even like I get that it happens at the at the bureaucratic side? And that's part of it. And I'm, I'm kind of I'm kind of asking with an idea of where you're going to go with it. But I don't know, which is why I'm just generally asking, like, what, why? Why would somebody that's in charge of a bureaucratic level, within the government go, we should make things more expensive. Like because because like, it's it's not as simple as that. But as a as a whole, that conversation in a way kind of has to happen. So
Sean Cooper:right no, there are a number of government economists that have said that a certain level of inflation is good for the economy. I have yet to see any argument that suggests that that is legitimate personally. There are lots and lots of studies that have shown that inflation is very bad for the individual, especially retirees, why the government might might want inflation actually, a certain level of it is honestly, for the purpose of paying off debt. Ah if, if someone has lots and lots of debt, and they're paying a relatively low interest rate on it like they are right now, because interest rates are incredibly low, you're no you're paying one 2%. And inflation is say 2%, it actually averages around 3% annually in the US, depending on the period you're examining. I think 3.1 is roughly what I've come up with, for the most part unless at least from their long term averages. But if you're paying debt of 2%, and inflation is 3%, then you're effectively paying the person who loaned you the money back with dollars that are worth less than the dollars that you borrowed, even though you're paying more back, it's actually worth less. So it actually makes it easier to pay off that debt.
Chris Holling:Gotcha. You're saying that when when the inflation occurs, and there's there is more, more value to the dollar, that it It might not be as much money as they be getting back in, in certain debt payoffs, but at least the debts are being paid off. Is that what you're saying? Paid off
Sean Cooper:All right, well, so for example, if I were to borrow$100 from you, okay, I take that$100 and I go out and buy $100 worth of goods. And when I pay you back, I'm going to pay you 2% interest some in a year from now I'm going to pay you $102.
Chris Holling:Okay.
Sean Cooper:But that $102 now only buys you roughly $99 worth of goods.
Chris Holling:Gotcha.
Sean Cooper:So I paid you more than you paid me, but you were able to purchase fewer goods than I was.
Chris Holling:Right? That totally makes sense. What? What do you do about the fact that both of your legs are broken? Because you were a day late paying me back my $102?
Sean Cooper:So you're a loan shark and you get your goons to come after me? Yeah, I don't think that has any impact on inflation.
Chris Holling:I'll tell you what I'm gonna I'm gonna tell you a story that I, you know, I'm gonna clip out of this section right here, and I'm gonna throw it at the end. If we deem it's appropriate. And if we don't, then I'm just going to get rid of it.
Sean Cooper:Okay,
Chris Holling:but so,
Sean Cooper:wow. Chris, the loan shark.
Chris Holling:You know, alright, so same time period, because now I'm just telling stories. There was, there was another time. This was actually my first ever lesson in business. And I didn't even realize I was doing it. We, there there was, this was at school. And we there was a section where there were all these lockers. But there were like sections in between each ones that didn't have locks on them. And so the people like there were there were enough lockers that everybody got assigned one with a lock on it. And the only rule with the ones without lockers is if you bring in a lock, it's your locker. It's very simple. And nobody ever used them because nobody wanted to go buy a lot. And so me and a group of my friends, we we started doing a thing, where we really got sick of spending, you know, $1.50 for a can of soda, up at the front. And so we went to Costco, and we stocked up on sodas and got a couple locks and just took over a stretch of lockers. And it was our inventory. And we started having, you know, word kind of got out it was really just for our stash just so that we didn't have to go up and buy it all the time. And then people started saying like, Oh, you know, I'll give you like 50 cents for one, I'll give you 75 cents for one, as long as they're not paying at the front, you know, we didn't care. But then we we started making money. And wow, we we just kept our inventory up. And we just you know, we did a Costco run about once a week, we started using some of this money, actually, to start, we started ordering Domino's every day. And they, they drop it off, and we always get two pizzas. And we'd wind up selling by the slice the second one, because then that would pay for our two pizzas the next day. And so then we we use the money to buy that system. And then we had our pizza system. And we had the other one which we called the sugar shack once word started getting out. And then we started having people literally knocking on our our classroom doors and like waving to us through the windows so that we'd come outside and we would sell them goods. We had a sit down with the principal at some point and they ultimately you you either got to stop doing this or you got to cut us in. And we said No,
Sean Cooper:really.
Chris Holling:Yeah. And we just we just dipped out and we just we split the profits closed up shop and that was that. So
Sean Cooper:they wanted you to cut them in.
Chris Holling:Yeah, yeah. Because we were we were undercutting them ultimately, you know, if you're charging$1.50 that's still ridiculous today, you know, if you're charging a buck 50 for a can of soda. You know, like, no,
Sean Cooper:yeah.
Chris Holling:So we Yeah, we were undercutting them. And I, it was clearly enough to damage their business. So that's, that's why we got a talking to there's there's those my my two business stories, my my biggest business lessons I learned in high school, both legitimate not so legitimate.
Sean Cooper:That's awesome.
Chris Holling:So inflation,
Sean Cooper:inflation indeed. Yeah. So we were talking about inflation in the two to 3% range, which really doesn't sound that bad. And when I bring up the 2%, because the Federal Reserve is actually targeting 3%. So when we say that the government actually wants inflation, I'm not kidding. They're literally targeting 2% inflation. And so basically, anytime inflation is below that 2% mark like it is now. The Fed is going to be pumping money into the system to try to spur the economy. If it gets over that they'll start pulling money out of the economy to try to essentially slow it down and to control inflation.
Chris Holling:Absolutely.
Sean Cooper:And they've been pumping it in a lot for the last year about.
Chris Holling:Yeah,
Sean Cooper:at this point. Yeah.
Chris Holling:Yeah, I think that's a good point. And I was I was actually talking to somebody about this the other day, that it's, it's worth considering the circumstances that there are right now right now. Because we're, we're looking at God, what is it like 2.4% for mortgage loans right now?
Sean Cooper:Yeah, I'd believe that.
Chris Holling:So it's, it's hovering around that I've heard everything from 2.25 to like, 2.75. And over the course of the last year, just just homes alone. And when you're looking at things like that, when you're looking at things like HELOCs, when you're looking at just really any form of a loan, that you're going to be taking on in this stretch, where percentages are sitting below this 3%, like we're talking about, then make sure you're taking the time to consider whether or not this is a fixed rate or a variable loan. Because as the, as soon as the Federal Reserve starts to go, Hey, we got we got hooks in everybody, let's, let's start uping these numbers a little bit. And you've got a variable rate like you, you got to saddle up, because it's it's coming. But you know, that's, that's that's just something to be aware of, like maybe maybe the variable rate is something that is appealing to you, for whatever reason, again, this is because we have to make sure we're we're staying pretty regulated here. This is not advice one way or another, it's just encouraging you to be aware of what possibilities are out there, that if you don't have a fixed rate, and the Federal Reserve decided to up that that interest rate and start needing those banks to pay them back, which means you're going to be paying the banks back at whatever interest rate that they're starting to have to deal with, then it's it's something that could come around, and it's something that's worth considering. Is that is that fair, is that tactful enough?
Sean Cooper:Yeah, yeah, you just want to be aware of what you're, you're getting into fixed rates are I mean, I think fixed rates are a nice option, option right now.
Chris Holling:Sure.
Sean Cooper:variable. You know, time when interest rates are this low, you might be able to save some upfront, but you're gonna want to monitor it down the road or be in a position to pay it off or refinance. And when you if interest rates are already going back up. And that's why you want to refinance, then you're going to be refinancing into something higher?
Chris Holling:Sure. That's a great point, actually.
Sean Cooper:Yeah,
Chris Holling:I didn't even think about that. That's a great point. So yep. They can get into a little bit of trouble there. But they, you know, it's something to consider, but you, you want to be smart about it. Sure.
Sean Cooper:So the other thing we touched on a bit ago was CPI as a measure of inflation. And that that basket of goods and one of the things I find really interesting about it is the fact that it has been changed numerous times over the last several decades. So while the government is literally shooting for a certain level of inflation, there are those who believe that the the inflation that they have are quoting is actually being essentially under quoted, if you will, because of the way they've changed the CPI over the years, a couple of the different things that they have done, for example, depending on which CPI you track, or which one they decide to, quote, they, for the most part, have eliminated energy from the equation because it's so volatile, largely, I mean, the biggest piece of that energy pie is oil. So it ends up because it fluctuates so much, it ends up impacting the inflation rate fairly significantly. So they've actually pulled it out of the equation. They still have it in some versions of the CPI, but the one they typically quote and the one they're they're looking for, from a.
Chris Holling:Okay, so I, I know that you mentioned the CPI earlier, and I know that it's it's the ability to kind of monitor where where inflation is happening, and and I get that, yes. But that's like, Who are these dudes? Like, what? What? Like, I know, you gave me a title for CPI and stuff, but like, what, what
Sean Cooper:consumer price index
Chris Holling:Right? What? Like, what exactly is that their whole job is to monitor inflation, or is this kind of a byproduct of what they do? What
Sean Cooper:Oh, I don't know who actually creates the CPI. Bureau of Labor Statistics.
Chris Holling:Bureau of Labor Statistics
Sean Cooper:Yes.
Chris Holling:BOLS.
Sean Cooper:Yeah I guess yeah,
Chris Holling:BOLS.
Sean Cooper:Yeah.
Chris Holling:Got the bols on you for inflation. Okay.
Sean Cooper:Yeah, so some some of the other things they've done. So in addition to, you know, choosing to kind of pull energy out of the factor, which would make inflation look even higher, or rather, I would say accurate. And yeah anyway, another example of how they've kind of manipulated the number, if you will, is they've actually gone to the the extent of saying, Okay, well, if the price of certain goods goes up, then people are going to look for alternative goods. So something that would be deemed a rough equivalent, and therefore, we aren't tied to measuring the inflation of this particular good, we can actually say, Okay, well, it will start with the price of this good, but then when it gets too high, we can find an alternative good to use in that equation. So for example, an example of that would be steak. Okay. So there's
Chris Holling:I love steak
Sean Cooper:the prices, right? Yeah. So as the price of steak goes up, we're going to instead of measuring the price of steak every year, if it gets too high, then we're going to switch over to hamburger.
Chris Holling:Hmm
Sean Cooper:Yeah, okay. I can tell by your hmm that you didn't view that as a viable alternative.
Chris Holling:No, I burgers are excellent. Like,
Sean Cooper:right.
Chris Holling:I love a good burger. But I just, you know, I you know, I guess I feel like if steaks not available, I would I would shoot for another slab of something is probably the best term for it.
Sean Cooper:Right? Yeah.
Chris Holling:So
Sean Cooper:you're Filet Mignon. You have a New York strip or? You know? Yeah, you go from New York to
Chris Holling:Oh, that's an option
Sean Cooper:a chicken breast.
Chris Holling:You just said no steak. I mean, I'm like, Oh,
Sean Cooper:well see. So it depends on which steak they're measuring. That's That's what I mean is what is the viable option? They've arbitrarily decided that okay, well, the price of this has gone up. So people are going to use this instead. And therefore we're going to measure inflation based on this change instead of measuring inflation on this same good over time.
Chris Holling:tuna steak.
Sean Cooper:Right.
Chris Holling:No, I tuna steak is a great alternative if you haven't had to, like a solid sear on it, but like still very, like rare ish. Like you could you could call up the sushi place be like, No, I want to make sure that the center is like sushi. Anyway. Yeah. That makes sense
Sean Cooper:I hear you. I like a decent decent sear on each side. So it's still you know, nice in the middle. But my dad he'll order it and I tease him that it's still moving. Oh, yeah.
Chris Holling:I had I had somebody like that when I was working in the kitchens I back back in my my line cook broil cook days. I remember somebody ordered one and in very, very big bold letters. The description for their rare steak was all caps. Saying mooing with points. And I I remember that. All all that happened was you pull out the steak and you got the grill there. And I counted. That was it.
Sean Cooper:Whoa.
Chris Holling:And he loved it.
Sean Cooper:Yeah, that's pretty rare.
Chris Holling:Oh, yeah. It was tops five seconds a side.
Sean Cooper:Anyway, for those who aren't necessarily, you know, meat eaters and stuff. The point is
Chris Holling:right it's actu lly eggplant. It's seared eggpl nt, five seconds on each s
Sean Cooper:My point is that they have arbitrarily decided alternatives for us. And they, I would argue are skewing what actual inflation is by creating alternatives that aren't necessarily alternatives in many people's view. If I if I want an orange but orange prices have gone up so I'm going to get an apple instead. That doesn't really account for what I'm actually experiencing from my purchasing power parity.
Chris Holling:Yeah, God that's like comparing apples and oranges.
Sean Cooper:Right
Chris Holling:What the hell? So what happens is that a bureaucratic level for for both a Federal Reserve side as well as from the side of the CBI have certain
Sean Cooper:CPI
Chris Holling:CP, excuse me, thank you, it rhymes. So I slurred my words, the CPI. And so whether that is to encourage a good or discourage a good kind of kind of depending on where everything is coming from, those are all variables to inflation, and what kind of creates inflation? Are there any other variables we haven't talked about?
Sean Cooper:Hmm, I mean, again, it goes back to kind of that gray area of whether it ends up being in true inflation or if it's complete alternatives. For example, you wouldn't notice you want to say like, Okay, I have a computer. And, or even, we'll make it more direct comparison. Right now I'm holding a BA two plus Texas instrument calculator in my hand, it's a financial calculator, I would not view I would not view this. So if I'm looking at inflation, I would not say before I could buy an abacus. Now I can buy this ba two plus, and therefore the difference in the price of these two things is inflation.
Chris Holling:Right?
Sean Cooper:That's it. It's, I mean, it's a total technological advancement, that you can't compare the two in any way, shape, or form. So whether or not that gets included is, you know, a different story. And then there's also things like, technology, the price of a computer, over time has actually gone down. I mean, you look at the, the massive computers that they had, originally that filled entire rooms, at like NASA, for example. The the processing power, that's actually a great example, the processing power and the price of that computer, relative to most people's smartphones. This the phone you have in your pocket, right now has more processing power than the entirety of NASA when they put the first man on the moon.
Chris Holling:That is super true. And what a great way to compare the two. That's that's a great point.
Sean Cooper:Yeah. So
Chris Holling:and I mean, not to mention, too, I was watching some of that the other day, or watch it was, it was a random clip, I'm just, I'm not gonna sit here and pull it up and go, Oh, look up such and such. It was an interaction between somebody that had a lot of money, and clearly because they had a camera following him around, and it was like, the late 80s. And that's kind of unusual at that point.
Sean Cooper:Yeah,
Chris Holling:somebody was following them with a computer, excuse me a camera, because he was going to go buy a personal computer. And it was something like, I want to say it was like a $1,500. computer that was like 32 kilobytes of RAM or something like that. Like, just the fact that it was so expensive. For something that is a fraction of the power that we have for computers now. And with it being the price of $1,500 30 years ago, is wild to me.
Sean Cooper:Yeah. Yeah.
Chris Holling:And they've absolutely come down in price.
Sean Cooper:Yeah, so technology is one of the few areas where we've actually seen deflation, if you will.
Chris Holling:And that's just a supply and demand thing, though, isn't it where people are just getting better at at having the technology available? And so then, then they compete? Otherwise, we would have seen these phones for $12,000? Probably.
Sean Cooper:Yeah, yeah. Yeah. Basically, you're looking at the supply side there. There's lots of supply lots of advancements in technology. So and for the most part, there's lots of people that are coming up with those advanced advancements. Yeah.
Chris Holling:Cool,
Sean Cooper:creates more supply, therefore price tends to drop.
Chris Holling:Well, we we have now touched on what creates inflation, what inflation is, and I think the only thing that's really left to hit is why it matters. I guess
Sean Cooper:that is a big factor.
Chris Holling:Yeah. So I mean, I'll try and I'll try and make it pretty, you know, man, let me see what I can do with it. And then when
Sean Cooper:you go ahead, and then I'll take over
Chris Holling:you go Chris, you're wrong. So the big thing to consider to me, when you're looking at inflation is the fact of being able to keep that as a factor because inflation does and will occur and will continue to occur. And that's been especially So ever since the the the matching of the gold reserve in the 80s gaveway and so the inflation has a lot more fluctuation that can occur in it. That means that when you're looking at the long term of these things, when you're looking at long term investing, you're looking at you have retired, you are going to retire, things that you need to consider include inflation, because if you know what your cost of goods are going to be, every year, if you just knew that every day, throughout the course of the year, you're only going to spend $50,000 on cost of goods. Well, even if things don't change, if you use the exact same hair gel, and exact same medic bills, and like every single thing is the same every year for the rest of your life, then those prices are still going to increase with inflation. And if you still only have that 50,000 a year available to you, then that$50,000 becomes worth less over that time of the cost of goods increasing, including medical bills and the like. And that's why it's, I usually try to say, like, try and think about what's important to you. But to me, that's why it is faulty thinking to say I only need 50,000 a year to survive through my lifetime after I retire. Because if you have a system where it's like a defined benefit, and it's 50,000, but you also get an increase with inflation and increase where it's it's matching the market each year. And it's a 3% increase from your defined contribution when you retire, excuse me your defined benefit when you retire, fine. But at least you're considering it. If you go well, I have X amount of money. And I retired with this much money and I know I only need 50,000 a year. And 50,000 a year buys me this many years after I retire is wrong. It's incorrect. And
Sean Cooper:right
Chris Holling:the
Sean Cooper:thing that you need to do with doc on the is in my headings are also like shorthand to try to make things go,
Chris Holling:I've got this lump sum of money, but I need it to be a match for inflation. Because anymore when when it used to be the reason that conversation even occurs still is because that was kind of the thought originally, you know, we're talking 50 years ago, where you would get your money, you put it under the mattress, and you might put it in a savings account and try to live off the interest or try to have interest take care of things. And and that was before the gold reserve and and things were different. And it's it's old thinking, and it doesn't work now. But you still get that advice, because people that lived by that and succeeded doing it still are alive today. And so that advice still floats around because you see these people and go oh, you have money? What did you do? Oh, this is what I did. You should do that. The thought is good. And incorrect. is am I am I off base on any of that?
Sean Cooper:No. I have kind of one correction, I would say But otherwise, for the most part, you really hit the nail on the head. The one thing I would say is the we went off the gold standard on August 15 1971.
Chris Holling:Dang, that's what you were going to correct? Of course it's a date. I thought it was going to be I'm sitting here I'm like, oh man, I've had faulty thinking on something this hold and it's a date.
Sean Cooper:Yeah, that's really about it.
Chris Holling:Geez. Okay,
Sean Cooper:but no in terms of inflation, long term inflation rates in the US have averaged about 3.1%. So if you consider that from a like retirement standpoint, so over the course of 10 years, $1 is going to lose roughly a quarter of its value. So it's only going to buy 74 cents worth of goods, that's what you were kind of talking about earlier, over the course of 25 years, it's gonna lose almost over half of its value. So it's worth only 47 cents, and over 50 years, it loses over three quarters, quarters of its value. So it's only worth 22 cents. Looking at that, that person trying to retire with$50,000. So kind of reversing the scenario. If you're you're retiring, you only need $50,000 to live off of that buys all the goods and services that you need. In 10 years, you'll need$67,851 to buy the exact same goods and services in 25 years, you'll need $107,260 to buy those same goods and services.
Chris Holling:Those numbers are super real.
Sean Cooper:And to your point about retirement. Yeah, you definitely want to make sure like if you if you have a pension and it's you know, somehow tied to inflation, it has some kind of almost like a cola cost adjustment for inflation.
Chris Holling:Yeah, and those those if by chance, you're you're thinking that those numbers are unreasonable. Like just think of how common it is. And this this actually kind of ties into some of the Social Security stuff that we've talked about before and whatever but how common it is for someone to retire around 60 you know, maybe 55, maybe 65, around 60, I think is a pretty safe, loose estimate. And the the average age of the American male American female comes to be about the ages of 80 to 85. Unless that's changed lately. And so you're looking at 25 years, right there, just just day to day living. of, I'm retired, I'm going to live until 85. Because I retired at 60. That's 25 years wich is, you're 47 cents on the dollar that Sean just talked about. And that's without variables, that's without extra expenses that come along the way, like we addressed in our first season, about the types of things that happen, when you do get older, and the type of expenses that can come up and how things can change, even just on the medical side, let alone trying to match medical advancements, costs of medical advancements, insurance, and inflation. It's, it's a lot. And it's, it's wild, which, you know, oh, 50,000 year and you know, that's, that's all I need. And then say you're on your on your 84. And you've got that$25,000 value worth of goods. And you're struggling to get by to make these things work, because your dollar doesn't carry it the amount that it does. And it's because you, you just had old advice. That's that's a hard conversation. And I can say, professionally from a, from a paramedic standpoint, that's a very real thing that happens to people, and it's frightening. And that's why this information is so important, I think. Because if you've, if you've at least got an idea of what's ahead of you, then at least you can build for that. Rather than think you're building for the right thing. Get there and go What do you mean, I did everything right? You did everything right, with bad information. And that's not what we want. We want good information. And we want it's it's not all good news here. It's hard news. But it's it's good news that you can be aware of it and move forward on that. Regardless of the of the age that you're looking at to start and get this stuff organized. Because at least you know what your goals are. That got dark kind of quick. I didn't mean for it to go down that road. Is there another hermit crab joke that I can throw down in here? Geez, okay,
Sean Cooper:I was probably going to go even darker, honestly.
Chris Holling:Yeah, I'm gonna I'm gonna, I'm gonna turn the fuel down on that one. I think so. Yeah, that was what, what, what, what else? Should we hit on? If anything? Do you think we got a good touch on? I'd say the only other thing that I've want to say, without even giving Sean chance is the when you're looking at all these things, and you're looking at your retirement, whether it's coming up soon, or whether it's coming up 30 years from now, just knowing that inflation is going to be a variable. And taking that in consideration, whether it's defined benefit defined contribution, or arranging your own investing process, or you have a lump sum and you're about to retire. It's It's time to call somebody to help get that stuff organized. And that's that's what this is about. You know, it's it's just being aware that it is a variable, and it's it's doable. I think I kind of said the same thing, but I felt worth reiterating.
Sean Cooper:That's all right. And I know you said you didn't want to go darker with it. But I think it's worth bringing up that we've been talking about inflation in terms of like roughly 3%. But if we look historically, you talked about you know, when we went off the gold standard, inflation, even in the US in the late 70s, early 80s actually jumped into the double digits. And that makes those numbers we talked about really go even crazier. You look at Germany during the war, they reached a point where their currency was so devalued. That people literally papered their walls with it because it was cheaper, cheaper to use the currency than it was to buy wallpaper. A trip to the store meant literally taking a wheelbarrow or a giant suitcase full of currency, just to buy everyday goods.
Chris Holling:Out of curiosity, do you know what the percentage was after the 07' 08' crash?
Sean Cooper:We actually had deflation in 2009
Chris Holling:did it just hold it 3% after that,
Sean Cooper:roughly it was you know, but kind of in that zero to 3% range mostly in the kind of one to two 2% range though.
Chris Holling:Gotcha. Okay. Oh, just curious.
Sean Cooper:Yeah, yeah, well, I'm like I said, you want to talk about other examples of when things really get dark, if you will, you can use Venezuela as an example of what inflation can really do. Because it's a little more more recent example. Venezuela has been a socialist economy and governance for years now. And actually last few decades, and their inflation, at least as long as they've been tracking it, and providing that information to the rest of the world has been in the double digits, literally for decades. So imagine what that's doing to their purchasing power. We're talking about like low 20% inflation annually. And they stopped reporting it in 2015. I think, so more recently, because they're, you know, they kind of their socialist programs or welfare programs were actually funded by government confiscated natural resources, specifically oil, and the price of oil fell out, their inflate, they basically just had to start printing money to be able to support all of their programs. And in doing so, their inflation started to ramp up. So that's why they stopped reporting it to the rest of the world, but estimates, and I've seen estimates any that actually reach significantly more than what I'm about to share with you, depending on who you're looking at. But the the most consistent estimates, I've seen show inflation in 2017, of 438%, in 2018 65,374.1% 2019, another 19,906%.
Chris Holling:That's insane.
Sean Cooper:And just last year, 2020 6500%. And those numbers are just almost unfathomable, especially when we're looking at, you know, 3% annually and seeing that, it literally means you have to have double the money in just 25 years. So magine 65,000, I mean it, it's ery difficult to even nderstand or grasp what that eans. So, to give you an xample, to try to put that in erspective, right, now, you can o to Costco, for example. And ou can buy one of those big ackages, like 30 rolls of harmin ultra soft, make, hey're the mega rolls, right? o 30 rolls of those, so they're he really big rolls are quivalent to like, I don't now, six rolls or something ike that. 214 sheets apiece. nd it's the good stuff, right? I mean, the ultrasoft we're no, we're not buying the che p stuff. But that's $27.99. o you're basically paying $1 f r 1.07 rolls, I mean, depending n taxes anywhere from one to, y u know, 1.25 1 and a quarter rol s, whatever. But if you experien ed inflation of, of 65,374%$1 would buy you 1/3 of one she t, one little square of that s me toilet paper, it would litera ly be cheaper to wipe with ur currency $1 than it would be with toilet paper, t at inflation those insane levels of inflation is effectiv ly compounding on itself, and j st continually just eroding y ur purchasing pow
Chris Holling:That's something because I was watching a mini documentary on just this. And it was it was really interesting because the when you look at the exchange rate, in general, you know, you, you walk in with your American dollar, and you pay however much you and you get a bag of potato chips for, you know, whatever the transition rate is the exchange rate. Yeah, whatever the exchange rate is between the two and you get you get the chips for the price that they would be worth here. But the people that live there, literally I remember they were demonstrating this, do you see this? This bag of chips here, if you have somebody that is working full time, all week, and arguably more than their, their standard 40 hours or whatever it is for that week. It would take them one to two weeks to afford that bag of potato chips to work in that society in order it's it's insane to even like to fathom something like that. And and that's, you know, that's not like a special store where they you know, they they have the Giorgio Armani of potato chips. That's that's not what this like. This is just the store down the street that has potato chips. And that's the cost. And so instead they have people that live in other countries that will either send currency back home from the other countries, and that's how they live. Because then they exchange the money and get a significant amount from it. Or they have the items shipped back from other countries so that they can live. You can't live and work in that society and actually function without an outside source at that point.
Sean Cooper:Yeah, crazy stuff.
Chris Holling:very real. But I'm glad we went over it. I'm glad it wasn't a five minute blip of us going. Did you know that money gets more expensive? like, Yeah, I did. Oh, cool. I'm glad we were able to touch on this, I think was good to get into some detail. Is there? Is there anything we're missing on this?
Sean Cooper:No, I think that's it.
Chris Holling:I like it. Well, then let's wrap it up. Thank you for joining us again, and starting off the season three, for the truth about investing. Back to Basics. My name is Chris Holling.
Sean Cooper:And I'm Sean Cooper,
Chris Holling:and we will catch you next time. On the next episode, I was so excited because I thought I was like oh, this sounds good. It's I will catch you next time and then I got so excited. I forgot what I was gonna say after that saying
Sean Cooper:And you blew it.
Chris Holling:I'm just No it doesn't. podcast disclaimer disclaimer. The disclaimer following this disclaimer is the disclaimer that is required for this podcast to be up and running and fully functioning and moving forward. This is going to be the same disclaimer that you will hear in each one of our episodes. We hope you enjoy it just as much as we enjoyed making it. All content on this podcast and accompanying transcript is for informational purposes only opinions expressed herein by Sean Cooper are solely those of fit financial consulting, LLC unless otherwise specifically cited. Chris Holling, that's me, is not affiliated with Fit financial consulting, LLC nor do the views expressed by Chris Holling, me again, represent the views of fit financial consulting, LLC. This podcast is intended to be used in its entirety. Any other use beyond the author's intent distribution or copying of the contents of this podcast is strictly prohibited. Nothing in this podcast is intended as legal accounting or tax advice and is for informational purposes only. All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation. This podcast may reference links to websites for the convenience of our users. Our firm has no control over the accuracy or content of these other websites. advisory services are offered through fit financial consulting, LLC, an investment advisor firm registered in the state of Washington and Colorado. The presence of this podcast on the internet shall not be directly or indirectly interpreted as solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow up or individualized responses to consumers in a particular state by our firm in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption for information concerning the status or disciplinary history of a broker, dealer, investment advisor or other representatives. A consumer should contact their state securities administrator. Amen. What lives in the ocean is grouchy and hates neighbors? A hermit crab.
Sean Cooper:Oh, yep, should have gotten that one
Chris Holling:Like Of course, like we
Sean Cooper:should have gotten that one.
Chris Holling:Once upon a time, I I accidentally became a loan shark in high school.
Sean Cooper:Really?
Chris Holling:I yeah. It's back when I was working in. In case I do keep this I'm not gonna use names. but I was I was in a kitchen type circumstance
Sean Cooper:Yeah, in high school. And what wound up happening is how it worked is if you worked the front of the house and you're serving tables, then you made tips, you made cash. And then if you worked in the back then you weren't making any cash. But you were working in kitchen, you'd experience doing it. And so I, I was just better with my money, I guess I think I just didn't have a lot of things to spend it on. But a lot of people would get their money and then they just spend it on stuff just out of the gate, and right
Chris Holling:What wound up happening is because I didn't spend mine right away. When I wasn't working in the front, I still had cash on me. And I'd start to have people like, Hey, can I borrow? You know, x? Can I borrow Y? can I can I borrow some amount of cash. And there was one guy in particular, that he racked up like 35, 40 bucks that he owed me which in in high school days is a big deal. And like anybody else that owed me anything was like maybe five or 10 bucks tops. And
Sean Cooper:right
Chris Holling:there was a guy that it also in this circumstance, this is where the kids went that either we're not good at sitting in a desk at school, or they this was kind of their last shot because they weren't going to college. So that to give you an idea of the types of kids that that I was with. One of them comes up to me He's like, Hey, man, look, you know, I loaned five bucks from you last week. And I'm so sorry. I told you I was gonna have it this week. And I can I got these things that are happening. It's, I'm just sorry, man. Like, I'll get you back. And I was I had just had another conversation with this other guy that owed me 40 bucks. I was like, Look, man, I don't know what your deal is with this guy. But he owes me 40 bucks. And you intimidate him for whatever reason. So how about you just remind him that he owes me 40 bucks. If you get my money, like this week, then we're square is like Yeah, all right. Cool. Sounds good. And I didn't think twice about it. But I should have because then the next thing I know is I'm turning a corner and I see him with this guy like up against the wall by his coat and like,
Sean Cooper:oh jeez,
Chris Holling:and I turned around and I left and I walk away and that was the day I accidentally became a loan shark in high school.
Sean Cooper:Holy cow.
Chris Holling:And I got my money back and a jacket. I believe the jacket was interest at that point. And I don't think I had anybody late ever again. After that.