Dealing with inflation like the wealthy

Inflation vs Income

I am sure most of us have heard the phrase “the rich keep getting richer and the poor keep getting poorer” more times that we can count. I know I have. However recently I had a deeper understanding of that statement and the lessons learnt broadened my perspective on wealth. Here’s what I learnt.

I was reading an article the other day on CNN money by Tami Luhby titled “Top 1% in America see income soar by 188%. Everyone else…not so much”. You can read the article here

http://money.cnn.com/2016/06/08/news/economy/top-1-income/

This is what stood out for me from that article

  • Top 1% saw their income rise by 188% i.e. approximately  3 million of America
  • Upper income earners saw a 63% increase
  • Middle class saw 18% increase
  • Lower income saw 18% increase.

This increase is over the course of 34 years, from 1979 to 2013. The unequal increase in income of the 1% compared to everyone else is indeed startling but it gets even more interesting and personal. Within the same time frame inflation has increased by approximately 229.6%!! So if in 1979 you purchased an Item for $1, in 2016 that item would cost now you $3.30 dollars. Although this statistics was derived from the united states the phenomenon holds true no matter the country or currency. The cost of living has increased over the years. You can have a play with the inflation calculator I used if your curious. Link below

http://www.usinflationcalculator.com/

If we average this 229.6% inflation over 34 years, it means every year there was an average increase in the cost of goods by 6.75%. Compare this to the 0.5% (lower income) to 5.5% (Top 1%) increase in income over the course of the same 34 years. Already you can see that if your salary is your only source of income, automatically you are getting poorer because the purchasing power of your money is reducing each year. You didn’t have to spend the money to become poorer. And it does not look like things will get better.

This is where the 1% are different. Tami Luhby article breaks down how the 1% make their money as shown below;

  • 36% from wages.
  • 38% from capital gains.
  • 23% from Income from businesses and partnership.
  • 3% from other sources.

Although to most of us the 1% seem out of reach, I believe we can learn a few lessons from them.

I believe we can take to heart the following lessons;

  • You have to generate other ways to earn an income. Invest. Start a business. The 1% have more than one source of income. It is their multiple sources of income that allows them to comfortably deal with inflation much better.
  • Financially plan for the future. Do not leave it to chance.
  • Live below your means. Manage your expenses. Curb the spending. By doing nothing at all your spending power is already reducing so don’t make it worse with excessive spending and no money management.
  • Pay yourself. Save. Invest in yourself to increasing your earning capacity.
  • Educate yourself about personal financing and wealth creation. There are articles online you can read that can give you ideas on how to create another source of income no matter how little. Its a start.

I am not suggesting any of these will be easy at all. But try to do what you can, when you can. At this rate can we as a generation really afford not to try?

If you feel this was beneficial to you or will be to someone please share with your friends and family.  Your comments are always welcome as they will help Peconomics serve you better 🙂

6 thoughts on “Dealing with inflation like the wealthy”

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