Benefits of Inflation – Episode 475

This transcript was auto-generated and may contain errors.

[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, we are going to shock you because we’re going to tell you there’s a couple of good things about inflation and that means turn off the news, everything else. We’re sharing just the good. Sure there might be some bad, but let’s unpack the good today. I love it. It is always so joyful to stay away from the news and fill your brain with the things that you want in there, not what somebody else does. And there are three very specific things that are benefited by inflation, like numerically, mathematically provable, that there are items in your life that benefit from it. And I think we just get so caught up in all of the messaging that the press has

[00:54] out there. general term, you know, TV, blog posts, commentary on social media, you know, newspaper type things. I do know some people that still read those. So I think the message is that inflation is scary and bad, right? Are you seeing anything different? No, I’m not seeing anything different at all, unless it’s in very secretive or selective circles. That’s the better word. Yes. Then the conversation is different. Well, so let’s dive in on the three that are actually benefited from inflation that I think people just either forget about or get so caught up in the emotional aspect of, oh my gosh, my food prices are going up. It is so helpful to stop and arrest that kind of thinking because it’s not going

[01:48] to do you any good and we want to do you good. So to be specific, a mortgage payment that has a fixed rate, so like a 30-year fixed mortgage payment, if it’s about $1,000, they’ll just use easy math so that people can get a sense of it. And you start out writing checks for $1,000. You’re going to write 360 checks that the numbers on the check or on your online banking system show $1,000. However, due to the impact of inflation, by the time that you write that 360th check, depending on what interest rate you want to use to identify or measure inflation, that check is going to feel like approximately $300. It could be a little more or a little less depending on what interest rate you use. And what’s a challenge for most people is you actually have to have a financial

[02:50] calculator to figure that out. It’s called a present value calculator and HP 12C, or you can get financial calculators on apps on your phone. The Truth Concepts app does this job. There are others out there where you could put in $1,000, 360 payments and three or four or 7%, whatever inflation interest rate you want to use, and you will see a corresponding $300 to $400 result indicating that while your actual check or online bank is showing $1,000, the impact of that to your wealth is only $300. It’s a pretty big change. And with the mortgage payments out there, we’ve got the interest rate. So that’s one of the factors in the calculation. We’ve done episodes on 15 year versus 30 year. We can reference those.

[03:47] And obviously we’ve seen a significant change in rates that have happened. So we’ve seen it where we were in the 2 and 3% range and now call it 5 and 6%. It’s still not bad. I remember my first mortgage was close to seven. What was yours? Well, I have had mortgages that were well over eight. And it’s interesting because we know of people that have had mortgages that are in the teens, like 17, 18, 19%. My husband, Todd Langford, tells a story when he was first in his job right out of school, somebody was so excited when they went to close their mortgage at lunchtime and came back afterwards, but they got an 18% mortgage because at that point they had locked in already and they were hearing friends that were over 20.

[04:38] And so we take things so out of context. Our rule of thumb for over 30 years of helping people with their personal finances is that a fixed rate loan at 8% or less is actually an effective, efficient loan. And that is just not in our realm of thinking right now. We’re so frustrated that mortgages are 5, 6, 7, because they used to be 3, 4, but 5, 6, 7 is still a fabulous long-term fixed loan rate. It is. So that’s the first thing that’s good with inflation. So fixed rate mortgages. And that’s a solid rule of thumb, anything below eight. And it feels like we are still good in that range. You know, right now this is coming out summer of 2022. We don’t know how long that will be. It doesn’t really matter because we’re going to talk about the next two that matter.

[05:39] So the second one is life insurance premiums. So fixed policies like whole life that have guaranteed level premiums benefit from inflation just in the same way the mortgage does. So you could use the exact same numbers. If you have $1,000 per month life insurance premium and it’s fixed and guaranteed, which is what life insurance premiums are. And I’m not talking about the paid-up addition part. That number can move around a little bit, but the premium is guaranteed to stay. So same deal over 30 years, which is absolutely how long people should be contributing to life insurance policies in a lot of cases. That $1,000 monthly premium is going to feel like $300 to $400 based on just an average sort of normal rate of inflation in the 3% to 4% range.

[06:35] So we often will see people kind of gulp, oh my gosh, I’m going to contribute $1,000 a month to my life insurance. That feels like a little bit of a stretch. Well, literally the very next year based on inflation, that number is going to feel like less. And the next year, it’s going to feel like even more or less. And the next year, more or less than that. So that is item number two that benefits from inflation. And we know that the whole life product has the guarantees to be able to say absolutely positively guaranteed it will benefit from inflation. Absolutely. Yes. And I think that now is the time that you want to get locked in on something like that, because the younger you are, the healthier you are,

[07:22] and the more, we’ll call it energy of life, the better off that things are going to be. And fixed is that term piece, is that language that you always use for both the mortgage and the life insurance. I couldn’t even imagine trying to get an adjustable rate mortgage right now. That just seems insane. Yeah. So the third one, this is an interesting one. You want me to cover that or you? Yeah, go for it. Business loans. And on top of business loans, I think we put in the loans that we can take against our policies, because we can kind of lump all that together. So SBA loans, those are great. If you’re going to get business lines of credit, that’s great right now. Other types of loans. I mean, if we’re cash flowing in the business and it makes sense,

[08:14] it is a wonderful thing. And those loan rates are pretty decent right now. Yeah, so you brought up an important point. It’s a fixed rate loan that we’re looking for, whether it’s a business loan or a cash value loan. The loans at the insurance companies are fixed. The loans that are at banks are not always. We’re so intrigued by a lower interest rate, but we need to read the paperwork, because a lot of times the lower interest rates on the business loans and the cash value life insurance loans are actually variable rates. And I would say that in today’s world, it’s worth paying a slightly higher rate in order to make sure that it’s fixed and locked in. Spencer, how long of a period have you seen business loans locked in?

[09:04] I’ve got a number in mind, but I’m curious what you have seen. Call it, you know, ballpark is usually about 10 years for a lot of them. You can get some. And again, to not go too deep with it, but where we’re finding a huge opportunity, and this may be great for listeners in the podcast, there are a lot of people that are retiring from their businesses and they’re plagued with the decision. And it goes one of a few different ways. They either say, hey, I’m going to have this business and gift it or sell it to a family member. Or I’m going to take the business and put it on the market and try and sell it. And in many cases where it’s sad, they’re going to say, okay, I had a great time. I want to retire and I’m just going to shut it down.

[09:50] And so the other variable to this could be getting some type of seller financing. And I remember hearing a, I think it was at the summit for the advisors. And so any of our listeners that have been to the summit for advisors that Kim puts on every summer, one of the speakers mentioned that they had a client that was in a firm and there was an opening so that they could invest some capital to become a partner in the firm. And that would increase their income significantly. Well, one of the employees didn’t have the capital. The other employee had his life insurance that he was able to pull from. A loan from that made it possible for him to become a partner and accelerate his career. Same could be done if you’re going to sell

[10:42] or finance a business or whatever it may be. So that was my long way of saying, yes, 10 years, approximately. No, I appreciate the extra info. And it’s so helpful just to get a perspective on that because there are so many things that are out there with unknown timeframes. Variable rate loans usually are, and often can be interest rate only loans. And there’s nothing wrong with that. We just have to acknowledge that we’re possibly in a rising interest rate. I don’t know, it’ll be interesting to see. They have bumped it up and then it causes stock market bubbles or roller coaster rides, even miniature ones. And so then they bump it back down again. So Todd has actually done some analysis where he’s not really sure

[11:29] that they can raise it much more because of the concern that it does impact the stock market in a negative way. So we talk about rising interest rates, but what does that actually mean? Does it mean that they go from five to six mortgage rates back to 5.5, up to 6.5, back to six, up to 6.5, back to 5.5. And then the press always cracks me up when they do one of those six back to 5.5s, oh, mortgage interest rates are lowering. It’s really just kind of sad how the press could really throw our perspective on things. And it’s important to be able to step back and really look at that lens carefully. But I think you had another aspect of inflation that you wanted to bring up today. I do. So for our listeners that are watching by video,

[12:23] we’ll be able to see a silver dollar and I can even use a dime as an example. So up until 1964, our dimes or quarters or silver dollars, they had 90% of silver in them. And so what’s crazy to think about is 1964, a dime was a dime. I don’t know how much that would buy you. Maybe it’s probably bought you a soda and a burger or something like that. My guess is probably a soda. And right now, if you take that same dime from 1964, that’s worth anywhere between, call it $2 and $2.50. A silver dime. A silver dime from 1964 or before. Yeah. And it’s because it had silver in it. Money was worth something. And right now, the money that we have, obviously, is a fiat currency. And we’ve talked about this before on the podcast.

[13:21] And so we’re seeing that real money, meaning silver, gold, the money that we have in our policies, maybe the investments that we have, like loans that are out that people are paying us, things that can contribute to real money, but on that silver and the real money, that is a hedge to inflation of what it may be. Now, I’m not saying by any means, go and sell everything and get bags of silver and put it underneath your bed. No. That’s not my jam by any means. But for us to have a sound foundation and to really understand, I think is incredibly important. I love the info there. It is, I think, a big surprise to a lot of people. It’s certainly a fun game to play with younger children. And those coins are certainly purchasable at shops

[14:15] where you can actually have them look and see and help them get a handle on what value is because that’s a tough thing for kids to get their arms around sometimes and possibly even to understand a term like inflation when it’s talked about in the press all the time, the kids are hearing it. What a fun thing. I bet you’ve got some good stories that you have done with your young kids and helping them with that. Yeah, in fact, I’ve taught each kid individually. So I remember for them doing some work and I typically do it with about $5 and I’ll say, all right, so here it is. I’ll give you this $5 bill or you can have this coin here. Which one would you like? And they’re like, well, what is this coin?

[15:01] I don’t know. I mean, it’s a cool looking coin and it’s a little older looking. It says $1 on it. And they’re like, well, I’ll take the $5. It’s like, okay. And they’re like, well, dad, how much would it have been worth? And it’s like, oh, that coin, just that? It’s only worth about $30. And they’re like, what? Gosh. Really, dad? And it’s like, yeah. And you know, it’s a great example because they learn it that fast. And it’s like, okay, this is silver. This meant something. And then you can go into a history lesson and honestly, where it usually turns is, okay, we’re probably gonna read a Tuttle Twins book and then we’re gonna go down this path. You know how, because that’s how kids have to learn.

[15:42] You have to teach them the foundations and you’re doing the same on the adult level because we just have different challenges. And so maybe our money looks like it’s being transferred from one count to another. And we’ve got medical pieces that are tied to it versus kid, they have chores tied to it. And so you’re helping with the insurance side and so I was helping with the silver side. I love it. Well, it’s always good to get good family stories from you all. You do great job with your kids and it helps me because our kids are adult now so I don’t get to play out opportunities like that with the more seven to the 18 year old space. And so I’m using you vicariously to do so. So thank you for that.

[16:28] I appreciate it. Thank you. And listeners, thank you for tuning in on the podcast. One of the things that you can do to help us understand how much you love the podcast is to share your feedback. And here’s what we’ve done. We’ve created a tool so that you can actually do that. And it is the most simple thing in the world. There’ll be a link inside of the description of this episode. And if you could share your feedback with us and make it possible for us to know what you think of the show, it’ll be wonderful. You click a link and there’s just a simple button from your phone and you can record your experience. You could say what you think of the podcast. You can ask questions and it will help us strengthen the community.

[17:14] And so we’ll put that in the description of this episode for you. Wonderful. Fabulous, thank you. Thank you, Kim. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit ProsperityThinkers.com.