Friday, August 18, 2006

Inflation and Why the Rich Don't Worry About It

If you follow financial news, you are noticing that there is tremendous focus lately on inflation and the potential impact on our economy. The fact is, with gas prices increasing and other items' prices increasing, real inflation is higher now than it has been in recent years. And (almost) everyone is starting to feel the pinch.

What many people are not considering with regard to inflation is the fact that the rich are not getting hurt by it nearly as much as the average person. Most of us have under 500K in total assets. People with fewer assets are accumulating less wealth than the people who have more substantial sums.

In simple terms, rich people can afford the inflation. If inflation increases from 3% to 4%, the power of the assets that are accumulated by everyone does decreases. However, the rich don't worry about it. If they have 1 million dollars, each year, if it were invested in the stock market, these people have approximately 100k in income. This 1% increase means that the 100K of income can only buy 1k less of the stuff that it would have been able to purchase otherwise.

For the average person working to live and unable to live without working, the 1% increase might be more like taking 500 dollars of purchasing power away from someone who makes 50000 per year. On the surface it might not sound like much, but generally, people who have to work for a living in order to cover bills are people who are either in a negative-net-worth position or are in a situation where they are barely positive.

This means that the people who are able to live without working, might only lose twice as much as the person who has to work hard every day, but that person who works is working usually because they need that money to pay for expenses. The person is running on the hamster wheel just to stay in place. Obviously, this can be painful.

And in a good situation, when a person is able to pay extra on their debts, this inflation will reduce the amount of money that is available for such paydowns, keeping the person in debt longer, and paying more interest, and making asset accumulation even harder.

The rich on the other hand, do not need to work. Their money will continue to grow, and with compound interest working in their favor, the rich are able to continue their lifestyle, mostly without interruption.

What to Do?

That is the natural question right? What should I do if the situation is better for the rich? Get rich! If you are in the situation with many other people who are stuck in large piles of debt, there are some good resources available for you if you are willing to look at them and make some changes to improve your life. Nothing will come quickly, but slowly but surely, you will see a change, and that change can be an amazing thing as years go by. You too, may not care about inflation someday. I know that is what I'm hoping for.

No comments: