A Double Hit to Your Wallet: Diminishing Purchasing Power and the Scourge of Inflation

Two things will destroy your financial security and independence faster than any others: inflation and taxes!

Inflation may simply be defined as costs of goods and services increasing resulting in a loss of your purchasing power. Inflation is now running at approximately 9%. Components of this index include fuel costs, electricity, food, clothing, housing, health care, etc. If I asked you what categories are most critical to your budget what would you say? Unless you’re Warren Buffet or Bill Gates you probably said food and energy. Because those are the things you buy almost every day! By those measures inflation is actually running between 12-25%! How long can we live with this sort of inflation and it not affect our daily lifestyle or our ability to be financially independent someday?

Consider this scenario:

I have $10,000 sitting in the bank earning 1% interest. As a result, I earn $100 in interest per year. However, if my tax bracket is 24% (based on, say, an income of $90k) my earnings are $76. Then if inflation (the cost of gasoline, food, utilities) is running 9% I have lost $900 so my $76 and my $10,076 is now worth about $9,176. I have gone backwards by almost 10%! Yet as we just saw in the above chart your real loss is probably closer to 18% or $1,800 of purchasing power, leaving you with about $8,276.

The Rule of 72

There’s a rule in finance to help you gauge your return or determine the inflation rate. The formula is to take the rate of inflation or investment and divide it into 72. The result represents how long it will take for your money to double, or conversely how much of your purchasing power will be lost. If I have an investment earning 6% and I apply the formula (72 divided by 6 equals 12) my money will double every 12 years. If inflation is running at a rate of 9% (72 divided by 9) I would need double the amount of dollars to have the same purchasing power every 8 years. 

Consider this alarming example: $6.50 a gallon gas in 2022 at 24% inflation means our gas would be $13 in 2025! This is not a stretch when you think that gasoline was $3.72 in 2019 (AAA Auto Club) and is now close to $7 a gallon. We have been very close to 24% inflation in gasoline in the last three years. 

Is this sustainable? Think of your grocery bills. A loaf of bread is $5. Basic commodities are so high now, I ask you: Has inflation caused you to change your purchasing habits? 

Many of us have received a raise at work, but unless your raise was well above 10% you are not better off financially than you were last year, or in the last several years for that matter. You can see why so many in government and finance are running scared right now because people are working harder, yet our quality of life is diminishing. Furthermore, our savings and investments are being eroded by taxes and inflation.

What is the solution? Every decision you make must be viewed through an inflation or tax lens. I save as much money as I can through a 401k or other tax-deductible option. Retirement plans like this can also act as a financial buffer if you need to borrow money. Few things may be better than borrowing from your tax-deductible account? When I invest money, I put as much as possible into a tax-deductible retirement accounts. When investing I put my money to work in owning shares of stock, real estate or businesses that produce commodities or services people must have. If I am investing in businesses producing cars, food, energy, etc. my dollars are likely to keep increasing with inflation. Real estate tends to also stay ahead of inflation. As Mark Twain is credited to have said, “Buy land, they’re not making it anymore.” I try to only borrow money if it is subsidized by tax savings like a home, a sound real estate investment, or a business.

As you read this, taxes and inflation are eroding your purchasing power. Prudent and immediate action are required to lift you out of this economic challenge to financial independence.

Take control over your future. The dollars you earn belong to you. Nobody will watch your money like you! Make decisions based on economics, inflation, and taxes.  It is recommended to have competent advisors and mentors in navigating financial decisions.

Published by Dean Forman

I am co-founder and CEO of the John Adams Academies, an institution that is perhaps the most unique charter school system in America today. The Academies’ curriculum is designed to give its students an American Classical Leadership Education®. This is an education that pursues truth, beauty and goodness and turns its scholars outward in search of those whom they can serve in becoming servant leaders. This website is dedicated to sharing the concepts of an American Classical Leadership Education with its readers so that more citizens can benefit from the truth, virtue and wisdom of the past. The thoughts and opinions I share on this page are my personal views.

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