People love their money and any chance of getting higher returns gets them all excited. So does more money mean more happiness? Well, that's an intense topic but my "personal" beliefs are that if you have the money, then you have the ability to pretty much buy anything. To dive into the reality, things that you bought lets say 10 or 20 years ago wouldn't really cost you the same any more. The box of chocolates that you bought 10 years back for $10 would now cost you may be $15 in the current market. So the moral of the story is you need more dollars with time because the purchasing power of the dollar decreases as the prices increase. This wonderful phenomenon is called Inflation. In real life, you see inflation in effect with higher rents, increasing food precises and travel costs.
To see this in effect, see the buying power of $100 back in January, 2000 now equals out to $165.17 in December, 2021. Hence you would need 65 more dollars to buy the same thing which you bought for $100 roughly 20 years back.
 | ||
| Source: US Bureau of Labor Statistics (CPI Inflation Calculator) |
The Bureau of Labor Statistics publishes a lot of data on inflation. Here is a view of inflation over the last 20 years.
 |
| Source: Bureau of Labor Statistics |
The big hurdle that majority of the people face, is that their salaries or paychecks don't increase with a similar pace as inflation. Hence the need to make the money work for ourselves is real, else we keep losing on the value of cash if its just sitting in the bank. To follow this fundamental rule, here is an example breakdown of personal finances. If you see carefully, one of the smallest percentages is really cash in hand or savings which generate the least amount of interest (usually).
- 70% in stocks - domestic, international and commodities
- 20% in real estate
- 2% in alternate investments mainly cryptocurrencies
- 5% in cash in savings account
- 3% in bonds
Disclaimer! - This is a relatively aggressive portfolio, as it takes on more risk for greater returns because of potential volatility in markets. This might not be the right strategy for everyone.
Yes the approach is higher risk, but it may feel comfortable to individuals who feel confident about their cash reserves, strong employability or due to their side hustles. There can be many different approaches that one may follow. Some people are heavy on real estate, followed with stocks and then lastly cash. If you are slightly towards the older side of the age curve, a heavier percentage towards bonds and cash would make more sense as a safer bet. Whatever be the way you like to beat inflation I would recommend doing it, but don't let that money sit in the bank. That money will not invest itself, so be careful there!
The thing that could make it a little easier for people is if they try to maximize their 401K, Health Savings Account (HSA) and then setup recurring investments, they will end up with less cash in hand. Less cash in hand is less money to worry about or to go out and spend.
Another important point to remember is if you are offered cheaper ways to get cash at a lower rate and then turn it around to earn higher interest on it, I recommend doing it. Make sure you are careful on the fees and the costs that come out of the loan. An example is leveraging 0% APR credit cards that I covered in this article. If you are buying a car and the bank offers you a deal of 1% fixed interest loan, I would take it. I would not pay for the car using my cash savings, rather use the 1% loan and invest the savings to get 7% back on the money. Now the risk is that you don't always win. Some years the markets might just be in negative returns, but in the longer run, I feel its still a safer bet if going long is your strategy.
Hopefully, this was helpful in understanding on how important it is to make your money work for you! If you don't act, inflation will come and bite you.
(Disclosure: Please review the Disclaimer section prior to any investments.)