Reduce Debt Increase Wealth


July 03, 2022 MIsterchuck Season 3 Episode 120
Reduce Debt Increase Wealth
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Show Notes Transcript

What causes inflation and how to reduce the effects of inflation on personal budget. Knowing the causes of inflation will help in dealing with this problem. It not a short-term problem but will be a long-term problem. 

Article Link: By Jason Fernando

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Charles McDonald:

Hello, I'm your host, Mr. Chuck, a retired accountant turn truck driver, I reduce my debt in a relatively short period of time, debt reduction, to achieve financial freedom takes commitment, confidence, determination, inflation, what causes inflation, and how to reduce inflation on a personal budget, knowing the causes of inflation will help in dealing with this problem. It's not a short term problem, but will be a long term problem for the younger generation. So don't remember the late 70s and the 80s, when inflation was very high, for an example, the mortgage rate that I got, which was a fairly good deal at the time, and this was in the late 80s, mid 80s was 12 and a quarter percent on my mortgage. So what happens when the rates are so high? Well, the prices of houses don't accelerate, raises fast because nobody can afford to buy them, the selling price stays low, because the difference is gotta be made up and the additional costs of borrowing money. But on the other hand, your savings account was paying 1617 18% interest per year. So what's the difference? Why, back in the 70s, and 80s, mortgage rates were very high. But yet savings rates were very high. In fact, you could put money in your bank savings account and make more money on interest than you could investing in the stock market at that time. I believe that was true. I didn't have any money. So my problem was trying to borrow money. Because the rate of interest was so high, it made borrowing very difficult. So let's first start out is what is inflation and I have in my show notes, a link to an article, which I'm referring to is Terms inflation. 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 rays and the general level of prices, often expressed as a percentage means that the unit of currency effectively buys less than it did in prior periods. And flashing a big contrast was deflation, which occurs when the purchasing power of money increases and prices decline, which that's what we've been seeing over the last five to 10 years. Understanding inflation. While it's easy to measure the price change of individual products over time, human needs extend beyond one or two such products and vigils need a big and diverse set of products as well as a host of services for living a comfortable life. They include commodities like food, grains, metal, fuel, utilities like electricity, and transportation, and services like healthcare, entertainment and labor. Inflation aims to measure the overall impact or price change for a diversified set of products and services, and allows for a single value representative of the increase in the price level of goods and services in an economy over a period of time. As courtesy loses value prices raise and buy, and it buys fewer goods and services. This loss of purchasing power impacts the general cost of living for the common public, which ultimately leads to a deceleration and economic growth. So let's go over that for a little bit. Inflation is just a measure of the rate prices on goods and services are increasing. And the definition of which goods or services the government that measures the inflation has change. that from the 80s to currently, so it's not exactly the same. So that's why if we weren't measuring the same goods and services they did in the 70s, and 80s, our current inflation rate would probably most likely be much higher. From what I understand, I don't know, for sure. But that's what I understand the causes of inflation, an increase in the supply of money is the root of inflation of though this can play out throughout different mechanisms in the economy. Money supply can be increased by our monetary authorities, either by printing, and given away more money to individuals by illegally devaluing or reducing the value of legal tender currency, more most commonly by loaning new money into existence as a reserve account credits through the banking system by purchasing government bonds from banks on the secondary market. And that's what's happened. We had a pandemic, and the government thought it was best to shut down almost all the businesses, but the big box stores, why the difference? I don't know, we're not here to be political. I'm just trying to explain the causes of inflation. That's it. The government spent trillions of dollars. And they, some of that money went to individuals, and we got money and our bank accounts. And we had that to span a lot of individuals who were unemployed at the time. And they also receive unemployment benefits, even those who never qualified for unemployment benefits in the past, now qualified, and that would be self employed people. So the money continued to be pumped into the economy. Everybody had money, and they were spending it. So there was a lot of money gone after a few goods, because companies were shutting down, they couldn't continue their manufacturing process, because employees were getting sick. And in order to try to slow that down, they would basically shut down for two or three weeks. And then it was a slow startup after that. So now we have a shortage of goods, along with an oversupply of money. So we have too much money, trying to purchase too few goods, what happens, the price of those goods increased. Then once the pandemic starting to ease up some, and companies tried to restart, they had trouble getting employees, maybe because employees didn't want to come back, they didn't feel safe, whatever that was, they had trouble getting people to come back and work with supplies flow down the startup process, which then create a larger deficiency and supplies worldwide. In order to get people to start back to work or can come back to work, they increase what they were paying. So that is another cause of inflation. And let's talk about the three different types of inflation. demand pull effect, demand pull inflation occurs when an increase in the supply of money. And credit stimulates overall demand for goods and service an economy to increase more rapidly than the economy's production capacity. This increased demand and leads to price increases raises. So when we got more demand, which is what we have coming out of the pandemic, last supply, which is the same thing we had, that was one effect that causes inflation demand pull effect. Also, the government spent trillions of dollar for different programs. So you had the government out there, buying up the same products that individuals are trying to buy. So the government helped create a larger shortage and especially in the housing and building industry, when the government came out and spend trillions of dollars for road and infrastructure approval. They were competing against everybody else for the same items. And that also increased the prices. That's why the cost of lumber skyrocket the price of concrete, asphalt masonary, you know, electrical wire, everything went up because you had the government trying to buy the same things as individual and businesses trying to do the same thing. So that was the demand pull effect. That was number one reason. Now we have costs push effect, the cost push inflation, as a result of increase in prices working through the production process inputs, when additions to the supply of money and credit are channeled into a commodity, or other asset markets. And especially when this is accompanied by a negative economic shock to the supply of key commodities, the cost of all kinds of intermediate goods rises, these development leads to higher costs for the finished product, or services and worked away into raising consumer prices. For instance, when the expansion of the money supply creates a speculative boom and oil prices, the cost of energy of all sorts of users can rise and contribute to raising consumer prices, which is reflected in various measures of inflation. So as the cost of production goes up, they're gonna raise the price of their final product that they are producing. So that's the cost push effect. And the third type of inflation. So far, we have the demand pull, which the demand is larger than supply, then we have the cost of creating the supply, which is the cost push effect, that's raising the price of the final product. And then we have a built in inflation built in inflation is related to adaptive expectations, the idea that people expect current inflation rates to continue in the future, as the prices of goods and service rises, workers and others come to expect they will continue to rise and in the future at a similar rate, and demand more costs or wages to maintain their standard of living, their increased rages resulting in a higher cost of goods and service. And this wage price spiral continues as one factor and dueces the other and vice versa. So as inflation is going on, and people's that the workers are saying, I need to make more money because my cost of living is going up, and their employers give them a pay raise. And then shortly thereafter, they raise the cost of their product, because it's costing them more. And it's a spiral that you cannot get out of it keeps going on and on and on. So every time the government says these, the minimum wage needs to be increased, that's doing the same thing. If you increase the costs of minimum wage, and then all the people who are hiring those people will then increase the cost of their product. So and when it's all said and done. Those people on minimum wage, whether it's five bucks an hour or $15 an hour are still about in the same situation. They were early earlier, they had not benefit from the increase of the wages because of inflation, which is the built in inflation. So how do we work to offset it? Well, there's not a whole lot you can do to offset the inflation. But what you need to do is if you're on a budget, the first thing you should say is get rid of your high interest debt. Pay off as quickly as possible. All your credit card debt, all your personal loans, every loan that you're paying more than 10% or a percent of interest on a need to get rid of them. Because you're gonna need that money to offset the costs they raise and costs of your everyday things that you need to live is get rid of your high interest rate debts. Now, do you pay off all your debt? Well, not really. Now let's talk about savings. We all need to have an emergency fund. We should have at least three to six months of money and a savings account that we can access for really quickly if we would need it. The problem is at your local bank, they're paying very little rate of interest. Even if you get a high yield savings account. In this particular instance, I know that my high yield savings account is paying one half of 1%. With inflation being eight or 10%, whatever it is, I don't really know. But I know it's up there, you're losing the value of your money. So every year that goes by this is say it's 10%. And you have about $10,000, in there. 10% of$10,000 is $1,000. So every year that you have that money sitting there, you're gonna lose about$1,000 worth of buying power. So your money is going to be worth a whole lot less, there's not much you can do about that. But if you have a two years or three years worth of savings, and your savings account, the need to move it someplace else, the only place you can move it to where you can keep up with interest as the stock market. If you're not comfortable with that he need a financial advisors to start with, he should talk to somebody you need to learn about it, you need to study it up before you put any money in the stock market. But one way to offset inflation is to have money in the stock market. And then you might be able to break even at best or maybe outpace it a little bit, I don't know. So keep the minimum amount that you need in your emergency fund, pay off all the debt you have. And high interest debt now do you pay off your mortgage, maybe you have a mortgage and a line of credit, the line of credit, you're gonna have a higher rate of interest, you should work on reducing that line of credit, because when you make extra payments, your monthly payment is going to be reduced. So that could help you free up some cash in the future to help you pay for food and gas and things that you need to to live the necessities of life, the needs. But paying off the first mortgage, if you pay extra on it, it doesn't change your monthly payment. And if you have a mortgage rate of say, less than 4%. And interest and inflation is around eight or nine or 10%, you don't want to pay it off anyway. Because over time, you can pay it back with what they say is cheaper money, money is going to be worth less because of the valuation because of inflation. And you're going to be making more money, hopefully, because you're gonna get pay raise the hop help offset that. So you want to pay back those low rates of interest as slow as possible, and eventually pay it off by the time you reach your retirement age. Now, if you're not going to be living in a home, and you plan on sell it in five to 10 years, so you don't want to pay it down any quicker. You don't want to pay it off, unless you just want to have more cash when you sell it in order to have a bigger down payment. But it's advisable is to just make the monthly payment on that first mortgage and stay current. But don't do anything extra on it because you it's not going to change your monthly mortgage mounts. And the only way to change that would be to refinance it. And if you refinance a you're going to be paying more in interest was going to cost you more not even considering the cost of the refinancing. So just the increase in the interest rate is going to cost you more is what I'm referring to here. So you're better off not doing it and keep the lowest possible mortgage for as long as possible in this situation. Now, in my situation when inflation was so high, I didn't have any money in savings because I didn't have any money. And I will had a 12 and a quarter percent first mortgage, I was in a hurry to pay it down. And at that because if I could pay a little bit extra, every month, I could pay it off a little bit faster and save some interest. And when the interest rates start dropping, remember they get down under around 8% I thought oh my god, I gotta refinance. So I refinance at 8%. Then they kept dropping then it's like well when I get Get down the 6%. I learned I gain lower, and I refi. And it's like they're not getting lower. And there we are down 3%, you know, three 4%. And that's like, mortgage rates hadn't been that cheap since the 1940s. I remember my parents, when they financed their home in the early 1950s, I think they had a two or 3% rate of interest on their 15 year mortgage, something like that. So I'll be back in one moment was my final thoughts. If you want to contact me to request my spreadsheet for the budget, or leave a comment or ask a question, you can send it using my email, reduce debt, increase reduce debt, increase wealth is all together no spaces. If you'd like to ask a question, put question in the subject. If you'd like to request my monthly budget, put that spreadsheet in the subject matter if you want to leave a response of any kind is put a comment in the subject matter. I will get back to you as soon as possible. One of the reason why banks don't want your money and why they're not paying higher rates of interest on savings accounts, is because the government gave them much more money, they don't need any more money, they have more money than they know what to do with. Nobody is borrowing, they can't want it. And they're just flush with cash, because the government gave the Federal Reserve gave the banks through a credit. And then they print a bunch of money. And they gave it all to the bank to try to put more money into circulation. And that causes inflation. And when they did that the now the banks don't want to pay out they don't need to pay higher rates of interest, they get money to loan out because they have more than what they need three types of inflation, you got the man pull inflation, which demand is exceeding supply. So the cost of everything is going up, then you have the cost push inflation, with the cost of health, the raw materials is going up. So the cost of the final product goes up and around the talking about raw materials to use to make the product plus the labor used to make the product. You know this pandemic is disruptive to global supply chain. There's so much money out there. I believe that the baby boomers are retiring, they just they quit their jobs, when they got shut down. And they never went back as part of why and the labor shortage is because the baby boomers decided no need to work no more. I am retired, then yes, now went back, which is then causing a supply of qualified workers to do that particular specialized job. And then there's the built in inflation, where the price everything goes up. And the workers expect a pay raise every year and they get a pay raise. And then shortly thereafter, the price of everything goes up again. So these aspiring inflation, but this time, we have the government helping us out a little bit more by spending so much money and try and competing with private enterprises for the same goods, which are in short supply. And that's causing inflation. So the best thing to do for inflation is pay off all your high interest debt as fast as you can. If you have a lot of cash and savings account and you have debt, use that cash, pay off that debt and free up some money so that you'll have more cash available in the future to pay for your needs. tried to find some place where you can invest it if you don't have that. And that best place would be the stock market, which is currently on decline. But over the long run is one of the better places to go. Maybe stay away from bonds. I don't know need to talk to a financial adviser about that. But understanding inflation and how it's going to affect you is important to know that the we have built in inflation is going to happen a little bit every year. But knowing now why the banks are not paying on your savings account because they got too much money. They have they can't get rid of it. So they don't want any More so than not gonna pay any high rates of interest on any savings account, which could change, you know, who knows, fairly quickly. And just, you know, everybody's trying to buy the same thing. And that drives up the price of everything and then the shortages of the raw materials to build those products. It all comes together. So we got all three things that cause inflation going on. At the same time, we got the built in inflation, we got the demand pull inflation and we got the cost push inflation. I hope that helps you understand more about what is inflation and how it's gonna affect your life.