Something’s Eating Your Money!

This dollar bill has a DISEASE. It might seem healthy, but if you look real
close, you’ll see a virus that is slowly but surely eating away it’s purchasing power
every day. This particular virus is named inflation,
and every dollar in your bank account is infected with it. If you’ve ever taken a high school economics
class, you’ve probably already heard the term. But most of us only know that it’s the reason
one day we’ll tell our grandkids “Back in my day, Macbook Pro’s only cost one bitcoin”! But inflation isn’t just some benign force. It’s why getting a raise is so important, why the
cost of education is spiraling out of control and in extreme examples, it’s affecting
millions of people’s ability to put food on the table. And it’s something you need to learn how
to live alongside without letting it sideline your financial goals! Now, inflation wouldn’t be such a big deal
if everything inflated at the exact same rate. Who cares if housing prices skyrocketed if
your salary instantly compensated to match. The problem arises because different things
inflate at different rates and sometimes for completely different reasons. There are two main types. The first is cost-push inflation. This is when companies are forced to raise
prices because the cost of the materials to make the thing or provide the service has
gone up. For example, did you happen to notice how
vanilla ice cream is getting more expensive? Madagascar, the world’s largest supplier,
has been consistently hit with terrible storms that have been destroying the delicate crop. So if the companies relying on vanilla want
to keep their profit margins the same, they will have to consider pushing that increased
cost onto their customers in the form of a higher price. Which they can get away with to a certain
point, assuming the economy is healthy enough for it to not affect demand too dramatically. Then there’s demand-pull inflation. Take our hometown Austin. It’s a rapidly growing city but the supply
of housing hasn’t been able to match the demand. Meaning landlords and people selling their
homes are in the position to ask for higher prices than they did the year before. While both of these examples aren’t super
fun on our wallet, inflation is in many scenarios related to growth. When an economy is growing, the overall demand
for goods goes up. Conversely, when the economy isn’t going
well inflation tends to decrease because there’s not enough demand to support a price increase. But, like a virus, if inflation is allowed
to run rampant, really really bad things can happen. Take Venezuela. Corruption combined with economic mismanagement
and an authoritarian government has led to a humanitarian crisis of epic proportions. The hyperinflation is so bad that the government
refuses to share any official numbers, so Bloomberg created “the Cafe Con Leche index”
measuring the price of a cup of coffee in eastern Caracas. In March of 2018 that cup of coffee cost 1.2
Bolivars and just one year later, that same cup cost 2,800 bolivars. It’s no wonder that at nearly a third of
the population has left the country. So, whose job is it to make sure that doesn’t
happen? Here in the US it’s the Federal Reserve. The Fed, is the bank of banks and its job
is essentially to walk a tightrope between encouraging the economy to grow, aka, allowing
prices to rise, but at the same time, keeping inflation from gaining too much ground and
taking away the purchasing power of its citizens. The Fed tries to fight inflation in three
different ways: Setting the interest rate that banks borrow money from them, adjusting
how much cash banks are required to have on hand, and deciding how much new money can
be printed. These methods control how much money is floating
around the economy. The more money floating around, the more liberal
banks feel about lending it out, so interest rates go down. Which means it’s easier for people like
you and me to get a mortgage, a credit card, a student or small business loan, and the
economy grows. But if it grows too fast, prices will go up
faster than wages can keep pace—and your savings are suddenly worth a lot less. That money you set aside for a Hawaiian vacation
will now only get you as far as San Antonio. There’s no question that regulating inflation
on macro-economic level is massively complicated. Thankfully, Unless you’re current Federal
Reserve Chairman Jerome Powell, you don’t have any control over it. But on the micro-economic level it’s your
job to inoculate yourself. And guess what, there’s only one vaccine
out there, investing. Most people know they should invest…but
why? Why can’t you simply save your way into
wealth? I think it’s time to… Run the numbers! This is Tricia. She feels sort of scared of the stock market
and travels a lot so she doesn’t feel like owning real estate for the foreseeable future. What if she wanted to try and save money into
a checking account to get to her personal retirement goal of 850,000 dollars? If inflation didn’t exist, it would be pretty
simple algebra. If she started saving at 30 and wanted to
retire at 65 that would require her to save $2,023 per month in order to hit her nest
egg goal. A challenging number to hit even for higher
earners. But the reality with inflation is way worse. The Fed’s goal is to keep inflation at around
2 percent per year. So let’s say that actually happens. That means in order to keep the same purchasing
power of 850,000 in the future, her new goal will have to be adjusted to almost 1.7 million
dollars. That would require her to set aside double
the money or the equivalent of $4,047 per month. Yikes! But if Tricia decided to educate herself a
bit and move past her investing fears, she could harness the same forces that created
the inflation in the first place to her benefit. If she decided to invest her way to retirement
through some stock-based mutual funds with an average return of 8% per year, she could
still hit that 1.6 million dollar goal, by only saving $822/month. Ok, while that’s not chump change, that
sounds WAY more realistic than four grand a month! It’s also important for Tricia to keep a
close eye on her income. If it doesn’t increase to keep pace with
inflation, she’s essentially making less money every year, even if her salary stays
the same. So instead of seeing inflation as an evil
virus, let’s think of it like another invisible powerful force, the wind. You can choose to work against it or hoist
a sail and let the forces at play work on your behalf. And that’s our two cents! Thanks to our patrons for keeping Two Cents financially healthy. Click the link in the description if you’d like to support us on Patreon. Have you noticed the effect of inflation in
your life? Tell us about it in the comments.

100 thoughts on “Something’s Eating Your Money!

  1. I'll keep looking at inflation as a private tax created due to over loaning by banks. Knowing when the large down turns hit they will have to print more money and use it to buy up assets when they are at the cheapest possible level keeping us all slaves to the bankers that run the Fed. I'll pass on the propaganda pretending it's like the wind.

  2. Would you do a series on how to invest? Ways to start young because it's quite scary trying to understand it when there is so many "ways" and "advice"

  3. I honestly love every video. I learned more about finance watching these than ACTUALLY majoring in Finance at a University 😂

  4. lol i thought this was going to be a video about how much i waste on going out to eat! phew i do got to control that better.

  5. My fat ass clicked on this video thinking it’ll be about spending a bunch of money of food – eating away your money (me)

  6. Hi! please could anybody show how come $822 per month? trying to figure it out considering 5% inflation rate 🙂

  7. So…the fed moves numbers around so other numbers based on 'someone said supply and demand are valid physical laws, like gravity', don't also increase…and you have to play this wacky game to thrive in society. Yay! Can't wait to be in a post money; sorry, fiat currency, civilization.

  8. Great video, glad to see you covered this!
    I think discussions about the federal reserve & inflation lead into discussions around supply vs demand side economics. I.e. why is growth seen as the counter balance to inflation for the Fed. This is also something that there is a LOT of confusion & ignorance about in the general public.

  9. Federal reserve isn't the government and has 100% control over its action and money printing. The IRS isn't the government either. How is that possible? Idk it's fucked up in the USA and makes no sense. Would be an interesting video topic thougg

  10. Wrong Inflation is a hidden tax on savings inflation is when the money supply increases inflation is not a good thing devaluing your currency is not a good idea

  11. Great video. One thing you forgot to mention – there always a risk of all of Trisha's investment going to $0… You really need to know what you're doing before basically giving your money to other people in hope that they will give you back more!

  12. Yay , thanks for mentioning my country in your video, keep up with your excellent financial education videos, cheers from a fan from Madagascar.

  13. I remember a certain chocolate I used to buy, 100g. for 7.95 dkr. Here, 14 years later, it is now 13.95 dkr and I feel that is way too expensive, so I don't buy it anymore 🙂

  14. One small thing though. The US does print boatloads of the green dollar as it pleases and gives them overseas. The worst currency there is in the world.

  15. Problem with this attitude towards inflation is it benefits the current Keynesian system of economics, which is making the poor poorer, and the rich richer. Inflation transfers wealth, and slowly erodes the middle class, as wages have never kept up with inflation (Google GDP per capita vs. median income). Ever since we left sound money, money that can't be printed (eg some form of gold standard), this phenomenon has been exacerbated even more.

    The video is great, and the explanations on how to fight inflation are awesome. I fight inflation all the time as an investor myself, and protect myself, as well as take advantage of it. My disagreement comes to not treating inflation like virus, because it is. Keynesian economic policy will turn out to be a long term failure due to many very human problems when it comes to central banking and fractional reserve banking, and we move ever closer to that day of reckoning.

  16. The video should emphasize that inflation is both unnecessary and undesirable. The way it's written, it's like telling someone with chronic pain how to live with it, instead of showing how it can be cured.

  17. You say we should invest like it's something simple. In reality, for someone not well versed in economics, it's not that it's terrifying, it's that if you don't know what you 're doing you can lose everything.

    Also if I follow the "running the numbers" segment with my own country's minimum wage I just wanna cry 😛

  18. This was pretty good overall, but I have to say the bitcoin joke was horrible. Assuming BTC is used for purchasing in the distant future (and it might) then things should still cost about the same. What changes is the BTC buys more (the BTC "price" goes up). The reason for inflation is the FED (or whatever government) prints more and more currency to chase a similar amount of goods. The amount of goods increase, but slower than the creation of more money. BTC (and a lot of crypto coins) don't do that. If BTC has similar value in the future to what it has today, it will be worth more USD because the USD value shrank from inflation, but the BTC would have similar purchasing power. This is actually one of the major attractions of bitcoin, other cryptocurrencies, gold, etc.

  19. Could you all explain market bubbles? For example there is a supposed bubble in passive investments. But what does that mean?

  20. Your videos always make me feel guilty about my financial status, but tough love is better than no love! Thanks, as always!

  21. The "Fed" is the reason we have all the debt that we do! Every dollar that has been created since the "Fed" took over the US's money creation, there has been interest attached to them. That means that the US can never get out of debt!

  22. The "Fed" doesn't create all the "money" in circulation. Most of the "money" in circulation is digital and is associated with debt. The biggest majority of "money" is brought into existence with a signature of a borrower at a bank.

  23. Can you do a video on the History of the Federal Reserve, what its role is today, and what role the Fed should play in the US economy future?
    What if the Fed didn't exist?

  24. To those that have all their money in a savings account at a bank like wells fargo or bank of america, I suggest you consider switching to an online savings account like wealth front, which has an APY of about 2.3%, compared to the .03% APY that most large banks have for their savings accounts. At least then you're money will keep up with an average inflation rate of 2% (depending if the fed decides to lower the interest rates again). Or you can also invest in CDs like those from goldman sachs which have an APY of about 2.4%. So please do yourself a favor and take your money out of those accounts with shit returns. If banks are going to make money off of your hard earned cash, you could at least move it to a bank that offers you more in return. Just some advice from a stupid twenty something year old.

  25. Inflation is the increase of the money supply.
    So when the FED has to print more money to compensate for budget deficits, then the value of the money in your bank decreases.

  26. Inflation comes almost solely from the government you guys, Milton Friedman was trying to make everyone aware of this a long time ago in his video "myths that conceal reality"

  27. The misinformation on this: the fed doesn’t decide how much new money is printed, that’s auto determined by points 1 and 2 you had

  28. Fight inflation!? They are the primary cause for inflation 😂. The federal reserve and all other central banks print money to fund our bloated power. Inflation…. Speak of a regressive tax system…. Prices should be coming down with technologies becoming more efficient!

  29. Great job of glossing over the way that debt created currency destroys wealth. What is the point of saving when the real inflation rate is higher than the return on any but the most high risk investments? (and I include the stock and bond markets in that high risk category)

  30. Can't see the trees because of the forest. Inflation is a two sided coin. One side is greed or lack of and the other is population mobility.
    Back in the 90s while Bill Clinton ran the place he noticed jumbo pig investers weren't guaranteed allowing products to be sold cheaply. The investers soon blocked that by monopolizing the structure guaranteeing their return before anything else which of course must be everything possible 100% of the time. The other is immigration the less people the lower the demand and vise versa.
    As my dad would ofter tell me,"son, the price you pay has next to nothing to do with the cost of the product or service".

  31. In the former Yugoslavia where we had hyperinflation people could take loans to build a house and 10 years later only pay the equivalent of a cup of coffee per month to pay it off.

  32. Thanks for the great video but you missed the point with Bitcoin as it represents deflation. Ex if today MacPro is 0.1 Bitcoin in 10-20-30 years MacPro will be 0.001 Bitcoin assuming MacPro value out from factory stays relatively equal 🙂

  33. I didn't expect this to be an overview of savings vs investing. This was extremely well explained and should be taught in school.

  34. On the inflation topic: have you guys ever heard of Silvio Gesell's money theory?
    I guess it could be an idea for another video

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