What to Expect With Inflation – Episode 397

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[00:00] Hello, partners. This question is more for the current events that are happening. It’s about inflation and there are rumors that the minimum wage is going to go up and that interest rates are going to be bouncing around. So what we want to do is take a prosperity perspective on this. So Kim, you and I were chatting right before we hit record, there was a time decades ago when inflation was insane. So let’s understand this. What’s potential on the horizon? Yes, it will be interesting to watch and see what happens. And I love the alliteration that you came up with prosperity perspective. That’s the best. So it is important to remember a couple of things with inflation, whether we’re going to get it or not.

[00:50] And I think you could argue both sides of that. It is going to benefit a couple items in your life. So let’s not, first of all, be overly scared about inflation. Inflation benefits mortgage payments, whether it’s on your primary residence or investment real estate that you have. If your mortgage is fixed, if your mortgage is fixed, your mortgage should be fixed. If you have a fixed mortgage, have I made that part clear? You get to benefit from the inflation that in effect causes your payment to feel like it’s less. In other words, the check that you write is going to be the same, but it will feel like it’s less. So that’s a good thing. And then the second good thing, because we always want to focus on the good

[01:40] first, right? And then we roll up our sleeves and deal with the not so good is it will benefit your life insurance premiums, because guess what? They’re fixed also. Now your pay to petition maximum might move around a little bit, but your actual whole life insurance premium is a fixed number guaranteed to never change. And so inflation will benefit that. And inflation will benefit any other debt that you have as well. I’m not advocating going out and getting debt because of that, but it will benefit just like it benefits the payments, it will benefit the overall debt. So are those parts clear? Those parts are clear. So it sounds like there’s a next step in this. Yes, yes. And that is what does inflation do to cash and even assets that we have, but

[02:28] more importantly cash, because we know that liquid cash in a bank is taxable. And when it’s also impacted by inflation, you really get to a point where your cash in the bank is just not doing anything. And frankly, we’ve been at that point for a long time. Inflation is going to drive the interest rates back up for said cash in the bank. And so people are going to start to want to try to beat inflation. And on a short-term basis, that actually may not be possible. It will depend, but if inflation just skyrockets super quickly, then there may not be a lot that we can do about it. I don’t really see that happening. I really feel like the government is going to keep things in check, as we know they did in the last 12 months.

[03:21] You know, they kept stock market trading in check. They kept what the interest rates were doing, quote, in check. And while I wish they would leave it alone, they don’t. So when inflation or if inflation does begin to impact us, I think people turn to alternatives for cash. And this is what I love about the work that we do, because the cash value of life insurance is a fabulous alternative to cash, and it has dividends that move around every year. And so with inflation will come higher dividends. Now it’s not going to happen overnight. And the insurance companies may be a little behind like a year or two, because they only declare their dividend once a year and you as a policy holder only see that dividend show up on your anniversary date.

[04:11] Yet in my studies of the history of the life insurance industry and the history of interest rates in our economy and inflation in our economy, the life insurance companies have always long-term been two or three points above bank rates. So if there’s a period of time when inflation is a little bit above that, well, we just hunker down and deal with it. We know that long-term the life insurance is the best place to store cash and it typically has been able to stay above bank rates and sometimes even above inflation. Besides that, there’s just nothing more valuable in our hands than cash. And while we don’t want an inordinate amount sitting as cash, we want some liquidity for emergencies and for opportunities.

[05:03] And there will be opportunities. There always are opportunities. And so we want to be ready to take advantage of those. Yeah. A really good point there. Now, what about if we kind of dive in to the weeds on a daily person’s life? So for example, you know, uh, the proposal of $15 an hour minimum wage, obviously that’s going to affect the consumer goods, but you pointed out the benefit to leveraging good debt, not consumer debt, but good debt. And, you know, it could be commercial real estate deals or whatever that could be. Um, how are you, um, helping people navigate that world of saying, okay, be strategic on, on understanding what may happen inflation with your consumer goods, but then let’s be strategic on

[05:54] the, uh, leveraging of good debt. Well, I do want to address the first. Is sad that more people in our society don’t understand and many do understand and don’t speak about it correctly that when the minimum wage is driven to $15, the companies that have to pay that minimum wage are going to have to increase the cost of their goods and services. So the person that’s working for minimum wage gets a month’s worth of benefit, maybe. And then they’re really back right where they were. So that’s just a fact that we have to acknowledge, but you know, capitalism is a law kind of like gravity. And I realized that there’s a particular side of our society that things differently, but those are the facts.

[06:40] So as it relates to what you’re doing with your debt, it is truly a function of interest rates. And so if you can borrow money in the cost of money from a bank, from an insurance company is say 5% and you can invest at say 10%. And I’m just using that number because it’s easy math. Then you get a 100% increase in your capability because five to 10 is doubling. It’s not just 5%. And so let’s use another example. If you can borrow money and it’s at a cost of four and you have the ability to invest at five, and I’m not talking about taxes or fees or anything else, just keep all that out of the equation right now. That’s a 25% increase, not a 1% increase. And you have to use a financial calculator to prove this to yourself.

[07:33] And most of us don’t wander around with financial calculators. We do actually, we just don’t know it. Any smartphone out there can get a financial calculator. You can go to the truth concepts, financial calculator app. You can go to a myriad of financial calculators that are free on your smartphone and the most common one is probably HP 12 C or there’s a Texas instrument one four and five is not a 1% difference if looked at over one year. It is a 25% difference if you do the five to 10. So five in is the present value. 10 is the future value. One as the timeframe, you will see also the 100% difference. And then where I got confused in my language was if you happen to put an eight and a 10, you’re going to see the same 25% difference that you would with a four and a five.

[08:27] So maybe that’s a better example. If we do get inflation, your borrowing costs might be eight, but if you can get a 10% investment, that’s not a 2% increase. That’s a 25% increase. Yes. Yes. And I think arming listeners and, uh, you know, the people that you’re working with to understand the, the true numbers and what’s really happening is a lot different conversation because what we see in mainstream media is there’s a lot of fear that’s been peddling and then there’s a lot of greed and it can happen on the consumer side of wanting that higher dollar per hour on the minimum wage or whatever it is. But while you’re looking at it here and understanding the true numbers, there’s a lot of confidence and a lot of certainty.

[09:16] And, uh, your example was very clear. So thank you, Kim. It is so important to really keep an eye on your mindset and to not let the press get you focused on things that you cannot control. And while the same time you want to be educated and wise and open-minded and aware, then put a whole bunch of that on your not to pay attention to list what, once you’ve become aware, because focusing on what you can control, which is first your mindset and second, your actions, like the action of saving money, like the action of looking for deals, et cetera, way, way more important thing to focus on than whatever is going on in the mainstream press. Yes, very, very well said. Well, listeners, thank you for tuning in to this episode.

[10:08] If you do have questions, send those to hello at partnersforprosperity.com. If you are not already subscribed, make sure you do that on your favorite device that can be on Spotify, Apple, iHeartRadio, or wherever you find your podcasts, hit that subscribe or follow button. Thanks for tuning in with us again today. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.