Not too long ago, the government passed one of the largest economic stimulus packages in history with the CARES Act. The funding that the legislation provided helped many business owners and non-business owners alike, to weather the storm brought on by the COVID-19 pandemic. But could it create an inflationary bubble that might hinder your wealth gap? In this post, we will take a look at the CARES Act and how inflation affects your wealth gap.
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Throughout our nation’s history, there have been moments in which the government needed to provide some form of economic stimulus. There was The New Deal under Franklin D. Roosevelt that provided relief from the Great Depression. Later on, we saw the Economic Stimulus Act of 2008. It was intended to avert a recession. Ultimately, the Great Recession came and congress passed the American Recovery and Reinvestment Act of 2009 with a price tag of $831 billion. But never in our nation’s history have we seen anything as monumental as the CARES Act.
As the largest economic stimulus plan in our history, the CARES Act weighs in at a whopping $3.6 trillion! I can’t even fathom that amount of money, folks. I mean, how many four-wheelers is that? Let me put the enormity of the CARES Act into context for you. The budget for government spending from September 2020 to September 2021 is $4.8 trillion. With the single stroke of a pen, we put an additional $3.6 trillion into our national debt. Because of this, we have seen record-setting government spending in 2020. This leads most of the financial and economic experts to believe that we are about to see some form of an inflationary increase. It’s not guaranteed, but most believe it will.
We talk about inflation quite often when discussing economic cycles in the United States. But what is it, really? Well, the best definition that I could find states this: inflation is the rate at which general levels of prices for goods and services is rising, and consequently, the purchasing power of currency is falling. When we are looking at inflation, we typically look at either the Consumer Price Index (CPI) or the Wholesale Price Index (WPI). I wanted to point these indices out because I’m about to give you an example.
In 1967, the average price for a cup of coffee was $0.38. Good luck getting a cup for that price at your favorite coffee shop, today! According to the Bureau of Labor and Statistics, the average price of a standard cup of coffee has risen 630% since 1967. That means that your basic cup of coffee costs around $2.40 in today’s market. If you take that increase out to an annual rate, that’s an annual increase of 3.82% just for coffee. But there are different inflationary rates for different goods and services. Take healthcare and education, for example. The cost of your average hospital visit or annual tuitions has absolutely skyrocketed.
In a previous post, I discussed the wealth gap and how to calculate it. In that post, I used the example of a river to describe the wealth gap. Basically, if you’re standing on one bank of the river and you need to reach the opposite bank, you need to know how far it is from where you’re standing and then come up with a plan to cross that gap. However, in this example, you really have to deal with more than just the distance from point A to point B. You must also calculate the current that you will be fighting against when crossing the river.
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In this case, the current is the inflationary rate. As you make your way to your retirement goals, inflation is constantly pushing back. Therefore, you must factor inflation into your wealth gap calculation. This is how inflation affects your wealth gap. As you move forward, like the current in the river, inflation pushes back. As a result, you need to invest in positions that outperform inflation. Your cash will never be as valuable as it is today. And that’s not to say that you shouldn’t have any cash positions. You should. You should always have an emergency fund in your home and in your business. But you don’t want to invest in cash long-term.
There are a number of positions that you can invest in that can outperform inflation. Of course, equities and stocks can outperform inflation. Real estate could outperform inflation. Your business should outperform inflationary rates. You must ensure that your assets are yielding their returns post-inflation in order to bridge the gap.
When calculating your returns, you need to adjust your growth assumptions. Let’s use a portfolio as an example. In your hypothetical portfolio, you have $100,000 and you contribute $10,000 per year. Assuming a 10% return (this is not guaranteed), you can forecast that in “X” number of years, you will have millions of dollars. Great! You’ve met your retirement goal. Right? Not so fast. You haven’t calculated inflation into your assumption.
So, let’s assume that you do make the 10% return that you’re hoping for. Let’s also assume that the inflationary rate for the next 20 years is 4%. Where does that leave you? Instead of that 10% return that you’ve been counting on, you’re actually only getting a 6% return. So, you have to understand the current. You need to understand how inflation affects your wealth gap and account for that impact in your retirement planning. Maximize your assets with the knowledge that inflation will take a bite out of their potential value.
Friends, this series is meant to confront the issues that make business owners fearful and cause you anxiety. By understanding exactly what it is that you are afraid of, you have power over it. Overcoming your wealth gap doesn’t have to be a scary or intimidating process. Instead, you should approach it with confidence, understanding that you can control the situation. Take the time to figure out exactly how much it costs to live your lifestyle, determine where you currently are and where you need to be to sustain that lifestyle, create a plan to bridge the gap, and be mindful of how inflation affects your wealth gap.
Friends, life is hard. Life is complicated. But life is so good. Planning for your financial future can be frustrating, but it doesn’t have to be. With the right understanding and a carefully crafted plan, bridging the wealth gap can be at least financially simple!
If you feel that you’re wealth gap is too great a chasm to cross or if you just want an expert to review your plan, reach out to us. Schedule a meeting with one of the many brilliant people who make up the Financially Simple team to help you take control of your financial future, today!