How to not losing money to inflation
The Wealthy Gardener considered the simplest way to explain how inflation effects the value of money. “You are surely familiar with the story of Rip Van Winkle who fell asleep and woke up twenty years later, having missed the American Revolution, the death of his wife, the marriage of his daughters and the birth of his grandson?”
Jimmy nodded without answering.
“What the author didn’t mention,” he continued, “is that this unfortunate fellow went to sleep with $100 in his wallet. When he woke up twenty years later, he was glad to find this $100 not stolen. But then he quickly discovered that the cost of things doubled during his long nap.”
Jimmy smiled. “And so while he didn’t physically lose $100, he awoke to find that his money could buy only half of what $100 could buy at the time he went to sleep. Rip woke up poorer due to the effect of rising inflation.”
“You must have read this version,” huffed the Wealthy Gardener. “And his example is not too different from our own. Given historical inflation rates, the price of things double every twenty years. When you think of your cash in the bank, don’t ever forget what happened to poor Rip Van Winkle.”
“Got it,” Jimmy said. “So we want to get our cash into investments.”
“There is no choice,” shrugged the Wealthy Gardener. “We compete with inflation every day. Inflation grows on average above 2-3 percent. So tell me, what investment return do you need on money to not end up like ol’ Rip?”
“I need to grow money at 3 percent to maintain its buying power.”
“That’s right. Your money must grow at the rate of inflation after fees and taxes to hold its value. This is a crucial point to contemplate—a return that is equal to inflation is a real return of zero. To become wealthy, you must compete fiercely to always beat inflation.”
– Excerpt from The Wealthy Gardener
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