When you hear the word “inflation,” what’s the first thing that jumps to mind?
Is it the price of eggs?
Eggs really have it bad right now. If it’s not being the poster child for inflation, it’s the bird flu causing eggs problems.
Eggs are even getting blamed for ruining Easter! Just look at this headline from AP News:
“US egg prices increase to record high, dashing hopes of cheap eggs by Easter”
Yeesh. I feel bad for eggs.
I’ve certainly noticed the elevated price of eggs at the grocery store.
But, eggs are not the first thing that comes to mind when I think of inflation.
When I think of rising prices, my mind immediately goes to lunch downtown during the work day.
Now, please indulge me for a minute. I know I’m about to sound like the old man who yells at clouds.
I try to bring my lunch most days. It’s partly trying to eat healthier. The other part is that I have a hard time justifying the cost and have decided that lunch is really not something I care about.
Ever since I was a really lost boy in my 20s and started budgeting to create fuel for my investments, lunch was an easy thing to cut.
Even so, there are days when I run out of time in the morning to get a lunch packed before I’m out the door. On those days, I’m usually looking for something relatively quick and healthy.
I’ve noticed that no matter where I go near my office, it seems like the cost of a fast-casual lunch is between $15-$20. That’s true whether it’s a sandwich or a salad or a burrito.
$20 for a lunch that is not even the least bit exciting! That’s hard for me to swallow (sorry, couldn’t help myself…)
Am I yelling at the clouds alone here?
Why does it matter that everything is getting more expensive?
There’s no single explanation for why things are getting more expensive. For example, restaurants are facing higher costs for ingredients, labor, and even online reservation sites.
Setting aside isolated explanations, the reality is that all things tend to get more expensive over time.
The word for that reality is “inflation.”
Specifically, inflation is defined as “ongoing increases in the overall level of prices.”
If you were accustomed to paying $10 for lunch, and now that same lunch costs $20, that’s what inflation looks like.
Why do we care about inflation?
We care about inflation because inflation reduces the buying power of our hard-earned money. We can’t control or stop inflation. It’s going to happen.
Ask your parents how much they paid for their first car.
Or, you can ask my high school basketball coach. When we would complain, he would respond “That and $1.25 will get you a ride on the bus!”
Don’t worry, none of us knew what it meant either. Although, I wonder if he’s updated his quip to “That and $5.50…”
The point is, In order to counteract the drain of inflation, we need to invest our money.
Investing to do fun things later on is playing offense.
We’ve spent a lot of time in the blog talking about all the amazing things you can do with your money if you develop strong personal finance habits.
Strong personal finance habits include budgeting, paying off debt, and saving. We do these things so we have fuel to invest.
When you invest, your money grows without much effort on your part. You can then do those amazing things in the future.
That’s playing offense.
Look back at our friends Terry and Sally.
Terry took no risk and kept his money in a savings account. Terry did not play offense.
Sally took on reasonable risk and invested in the S&P 500. Sally played offense.
What happened after 40 years in our hypothetical scenario?
Terry, at a 3% interest rate from his savings account, had a total of $234,358.87.
Sally, at 10% annual returns from the S&P 500, had a total of $1,440,925.81.
As a result, Sally will have $1,200,000 more than Terry to do fun things with in retirement.
Sally clearly played offense. Terry clearly did not.
Investing to counteract inflation is playing defense.
You may be thinking that at least Terry’s “safe” approach meant that he played good defense.
Nope.
Terry’s approach was bad defense just like it was bad offense.
All because of inflation.
Investing to counteract inflation is playing defense. It’s protecting your hard-earned purchasing power.
Over the long term, it’s critical to invest your money and earn a return that exceeds the rate of inflation.
Otherwise, you risk not being able to afford the same items you’re accustomed to buying today because those items will be more expensive.
In our earlier examples of eggs and workday lunches, we’ve seen how things feel like they’re getting more expensive over time.
It’s not just eggs and lunches that get more expensive. Everything does.
Let’s plug some numbers into US Inflation Calculator to illustrate how things really are getting more expensive.
Let’s say you bought something in 2000 for $100. Based on the actual inflation rates between 2000 and 2025, that same $100 item would could $185.71 today.
That’s an increase of 85.7%!
So, by keeping his money in a savings account earning 3% interest, Terry may have thought he was doing the right thing because his balance was getting bigger.
The problem is that while his bank balance was increasing, so was the cost of everything he might want to buy. So, he had more money, but he could buy less things with that money.
That’s what inflation does.
The only way to get ahead of inflation is by investing and earning a higher rate of return.
So to return to our question: was Terry really playing good defense by keeping his money in savings?
No, because his actual purchasing power diminished even though his balance grew.
Investing is about playing offense and playing defense.
By now, you should hopefully be motivated to invest as a way to play offense and play defense.
It’s fun to think about what you can do with your money when it grows with very little effort on your part.
It’s just as important to think about investing as a way to protect your ability to buy the very same things in the future that you buy today.
Instead of being the man who yells at the clouds, you can be the one buying as many eggs and lunches as you want.
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