Dave has a problem: He has his eyes on a beautiful 1978 Ford Pinto — barely used. It’s a bargain for $24,000.
In a world without inflation, Dave could simply save $8,000 a year for three years and he would have exactly what he needs to buy his dream car.
But what happens when we add 3% annual inflation — the historical average in the U.S.?
The price of the car jumped from $24,000 to over $26,000 — an increase of more than $2000!
And that’s the curse of inflation: Your money is worth less in the future.
Take a common household item like a table. In 1913, the price of a table was $20. Today, that same table would cost you $470. That’s an increase of 2,253%!
So if your assets are in danger of being overcome by the rapidly rising waters of inflation, what can you do? How can you get ahead?
You have to grow your assets faster than the rate of inflation. You have to outpace it.
But if that’s true, then bonds, savings accounts, and money markets are out, because their rate of growth is just too small. Inflation will gobble it up.
If you want to grow your assets faster than inflation, you’ll need to invest in stock or real estate. Both have a track record of beating inflation. For example, historically, stock has earned a premium of 6.6% over inflation, over time.
So, if you were to invest $1,000 today and earned 6.6% each year, in 30 years, you’d have $6,803 — and that’s after inflation.
Or better yet, imagine that you invested $1,000 each year over that same period. After 30 years, your cumulative investment would have grown to $87,928 after inflation.
And that should be more than enough to buy the Ford Pinto of the future.
