Speaker 1 00:00:08 What's up, everyone. Welcome to the finance for physicians podcast. I'm your host, Daniel Raimi. Join me as we dig into what it looks like for physicians to begin using their finances as a tool to live better lives. You can learn more about our
[email protected] let's. Jump into today's episode.
Speaker 2 00:00:26 What's up guys. Hope you're having a great day. I'm sure you've heard in the news recently, or just heard in conversation with people, how inflation is seeming to be a hot topic. It's definitely something that is happening. And I think there's a lot of different spins on it. And some of it's, you know, painted in a super negative light. I think that the general consensus is that people view it as a negative thing, but it doesn't always have to be a negative thing it's and it really is not necessarily as scary as they sometimes make it out to be. So today we're going to talk about like what it is and kind of the backstory behind it and, and, and talk about some of the things to look out for and how to navigate it. At the end of the day, it's really just kind of a changing environment.
Speaker 2 00:01:19 Inflation is just one of those factors. And so the key is to understand, have a, you know, awareness of it and, you know, make those small adjustments as needed, um, as the economy and environment around you changes. And so we're going to talk through that today. Uh, hopefully you come away with just a better understanding of how it works in what you might be able to do as things change. Okay. So just to start out, I just kind of wanted to clarify, like what exactly inflation is. People throw it out all the time. And I think there's this expectation that everybody knows how it works, but in reality, it's, it's kind of complicated and, um, you know, most people don't exactly know what we're, we're really talking about. So let's clarify, like when I say inflation, what I'm talking about. So I think it'd be good to start out with like a really simplified example, you know, before or without inflation.
Speaker 2 00:02:17 So, you know, think about like, let's just say we're on a deserted island and there's like a hundred families and we don't have any money. We don't have any like, economy we're just like there and we have to survive. And so in that sort of example, you know, usually what people are going to do, like this is, you know, I guess what they did back in the day, you know, they just divide tasks up and they say, okay, you're going to be the one that is, you know, the medical, the, the doctor, or, you know, we go to for health questions, you're going to be the version that shakes takes care of our children as we're working. Um, I'm going to be the, that builds the houses. Um, they split up the, you know, the jobs that they need to do to survive, and then they just go to work.
Speaker 2 00:03:06 And so that in that sort of example, really, you don't need money. You're just surviving. You know, somebody in the a hundred families is responsible for growing the food and they bring it to the people and they, you know, split it up and eat it. So everybody kind of puts in does their share, and there's no money required because everything is provided for you. So that's like the super simplified example of, you know, free money. And in that sort of situation, like inflation is not a thing, uh, because you know, it doesn't matter as long as you're surviving, that's what counts, but what has happened or what happens with people is we're like complicated at the end of the day. Uh, life, life has, you know, becomes complicated. It seems like the world is getting more complex. Everybody's different. And so you start to get like, you know, let's go back to the deserted island example.
Speaker 2 00:04:05 So let's say, you know, now we've got a thousand people or 10,000 people and, you know, we've got 10 different people building houses. I'm one of them. And so maybe I'm like building houses faster or better, or I'm working harder. Or I have better people, uh, harder workers that are helping me. And so people, you know, there's more demand there as people start to realize that. And, uh, you know, they, they, maybe we fill up with business or maybe, you know, H how do we equalize our service from the guy down the road? It's like, you know, shortcutting, and it's kind of lazy. And so without some sort of like measure or store of value or economy, it's difficult. So that's kind of what happens. And then you throw, you know, so we introduce, say, um, money gets created. So money is kind of, at the end of the day, money is really just a store of value.
Speaker 2 00:05:07 So money, you know, people have money is a way to store value. And so that gives the them the ability to pay for a service, like, uh, you know, a home being built. And so then they get to choose. I'm going to spend my dollars with that guy instead of that one, because he does a better job, or he gets it done. Right. Or he does it fast. And then me being the builder, I can say, okay, now that I know people were paying, I can say, well, maybe I'll charge a little higher price because there's so many people that want it, you know? And so that's where supply and demand starts to drive up prices. So if I'm the builder, that's building good houses, I'm going to say, you know, I'm going to charge a higher price. Now that money exists and then prices start to go up because people want it.
Speaker 2 00:05:59 And you know, that that's, that's kinda, that's where things start to get complicated. Then on top of it all, so world gets bigger. People, there are tons, more people like it's complicated, then governments get involved and they get more and more involved over time. Um, and so, you know, sometimes they, uh, their actions like drive this whole, uh, pricing of goods and services, because at the end of the day, what inflation is. So back to the baseline here, what is inflation? So inflation is the simplest definition is when prices go up over time. So it's a measure of how much prices are increasing over time. So they call it inflation when prices are going up. So the opposite of inflation is when prices are going down over time, they call that deflation. So inflation is really just a measure of how much prices are going up over time.
Speaker 2 00:07:03 And the biggest driver of that is supply and demand. So going back to the home builder example, if I'm a home builder, my supply is how many houses can I build? The demand is how many people want to pay me to build those houses? So if there's a ton of people like waiting in line to pay me to build their house, like that's increases, that's a higher demand, which, you know, if I'm using economic principles, I can raise pricing to reflect, you know, based on that increase demand. So that's going to push prices up when demand goes up. So supply and demand is going to drive those prices up or down, really. And so governments have over time gotten involved in all this, and that's, that's really just made it even more complicated. So when money was introduced that made it complicated and then governments getting involved make it makes it even more complicated.
Speaker 2 00:07:58 For example, you know, sometimes governments can cause inflation like excessive inflation due to like, just printing more money. You know, when you give, you know, the, the country just keep putting out more and more money. If that's the only thing that's happening, then people have more money to spend. But at the end of the day, there's only so many people. And so that's going to just drive the prices of services up. But in reality, you know, it's just kind of a false created by the government's sort of inflation. So government's been ball and involved in definitely makes it more complicated. But I think, you know, governments, I think try to be responsible. That's a different conversation. I'm sure people have lots of opinions on that, but, you know, let's just assume today that governments are responsible and are looking out for, uh, their people or at minimum, I guess they want to get reelected.
Speaker 2 00:09:00 So they want to make people happy, at least in the short run. And so over time, governments have learned lessons from, you know, messing with money and causing, you know, high inflation. And I think like for example, in the United States, like the government, this is over simplified, but their goal is to kind of keep things relatively stable. Like keep the economy going. They try to keep inflation in place, but relatively low, like, you know, two or 3% is, you know, good, uh, prices are going up a little bit, but not, they don't want it to get too high and they also don't want it to go down. And so the government will on occasion do things to kind of try to keep things stable. So example lately has been with all this, you know, with all the coronavirus and economy got shut down. And so there's been a lot of like government in intervention and trying to keep things stable through that chaotic time.
Speaker 2 00:10:06 I mean, I think it's impossible to keep it perfectly stable. It's been kind of a up and down sort of set up, but, um, one particular thing they were doing was, um, paying out stimulus money or providing people with money. Um, they were basically adding to the money supply, uh, people had more money. So this is just kind of, uh, one specific example that has happened. So people, you know, the average Joe even, uh, has more cash lately just with the stimulus money that they've received. Now, some people have lost jobs, so there there's exceptions, but there was unemployment insurance, um, pain hang out. So in general, um, a lot of people have received stimulus money and a lot of them kept their jobs. And so there was a lot of people with some extra money that they didn't hadn't planned on. And so, um, use cars is the example on top of that, like new car manufacturers have had a hard time making cars due to all the issues with the computer chips and the shutdowns in the factories during COVID.
Speaker 2 00:11:20 And it's just like one thing after another, they basically had a hard time making cars, which is not really normally a challenge for them. So that's low supply and then people have money and that's high demand. And so what's happened is there's just really not a lot of new cars out there cause they're just not selling them. So people have gone to like resorted to use cars, even new car dealers are resorting to selling used cars because they don't have any new cars to sell. And so that's just heated up the used car market because so many peop consumers have money to buy a used car and dealers don't have any other cars to sell. So they're buying used cars. So a lot more people than normal are demanding used cars. Um, and the supply is still, you know, as, as just would use cars, it's just kind of been, you know, consistent.
Speaker 2 00:12:15 Um, so that drives prices up. So used car prices have inflated like considerably, um, in the short term and other things are happening like that. It's, you know, uh, travel has been a good example. It's been like down and then back up like travel costs are all over the place, but these are like short term examples. I think that's an important point. The car example I'm giving you is, you know, used car prices have shot up in the year or less timeframe, uh, due to this supply demand issue. And the fact that the government has put out a little more money into the economy, but I don't think a short-term spike in inflation is necessarily like terrible. You'll definitely notice it, but, uh, I think the much bigger risk to everyone listening is a long-term period of inflation. That's really what you have to watch out for.
Speaker 2 00:13:15 So the government at this point in the United States, the government at this point is saying, you know, they completely think it's a short-term blip and it will correct. And it very well could. And there's a lot of data that they have that would support that. And the fact of COVID and everything there, it makes sense that it would be short term. We don't know the answer to that, but that's kinda the government, uh, you know, what you read their reports is that they're sticking to their story of the fact that it's a short-term blip inflation has gone up lately, but it's a short-term blip on the radar. But I think the big concern is when it's, when we have long-term inflation. So if you look back at history, so I think history is always a good, good as a good story to tell the United States, for example, has had periods of like pretty high inflation.
Speaker 2 00:14:10 I think, you know, early eighties, late seventies was a pretty high inflationary time. That's probably the last like longer period of time of inflation, where it was like double digits that, you know, inflation, annual inflation price increase of 10% plus a year type levels. And then there's been some periods before then back in like the early 19 hundreds that were, um, I think like in the teens, there was a high inflationary period, but it's never been like hyper inflation in the U S at least since good records have been kept now hyper inflation inflation is when inflation gets like, you know, extremely high. So Argentina a good example. Um, they have had like hyper hyper inflation, you know, like 300% a year type numbers. That's that, that that's a very, very big problem. Um, but in the United States, they have inflation has been fairly steady, um, relative, but, but even in the early eighties, like having an annual 10% inflation is completely different situation than having like low inflation, like we've had lately.
Speaker 2 00:15:19 So we'll talk about, you know, how that might affect you, but just so for example, let's say I like to use the rule of 72 to kind of put these sorts of things in perspective. Cause I'm throwing out like percentages and it's like, you know, what does that really mean for me? So the rule of 72 is that you can, uh, translate a percentage return to a time period of when it's going to double the costs. So for this example, the costs, so let's say so 72, you divide it by the percentage rate we're using. So let's say 3% as the example. So 72 divided by three equals 24. So that means with a 3% annual inflation, the price of goods and services will double every 24 years. So that kind of gives you a long-term, you know, or how long is it going to take to make a substantial difference?
Speaker 2 00:16:18 So 3% is like the inflation in the past 10 years or so has been in that one to 3% sort of range. On the other hand, if it's like 6%, that means prices double every 12 years, or if the inflation is 12%, that means prices are doubling every six years. So it can compound up to where prices are going up fast. But like I said, right now, you know, or the past 10 years inflation has been in that, say one to 3% range now, lately. So this is, I'm kind of going off the CPI index. That's just one measure of inflation. There's a lot of people that like debate on how you measure inflation. Consumer price index is one measure of inflation. Uh, it definitely has its weaknesses, but, um, it's probably the most widely used. So lately, like in the past few months, it's like creeped up to like 5% sort of range and that's like the 12 month measure of inflation.
Speaker 2 00:17:18 So it's definitely going up. The CPI is kind of like a measure of multiple goods and services. So, you know, certain categories will be up higher than others, but 5% is definitely very high relative to the past 10 years. So going back to what I said a minute ago, the government, our government has said all along well, you know, especially lately that they expect inflation to go up, but they predict that it will be a short term. So long-term inflation is what we really have to keep an eye on. I think if it is a really short term lip, let's say it's five, 6% sort of range for the next six months. And then it goes back to that one to 3% range. That's really not. I mean, that's just like a blip on the radar. I don't think that's going to have much effect on, you know, the situation.
Speaker 2 00:18:15 Um, it, it's kind of like just going back to what it was before, but what about if it's a longer term period? So before we get into that, um, I think the question I would ask yourself is like, how susceptible are you to inflation? So I was reading, um, an article, I'm sure some of, you know, white coat investor, he wrote an article about inflation and he was talking about this in the article. I'll link to it in the show notes about inflation. And he, I think he's talking about the inflation kind of like one-on-one basics type stuff, but, um, he talks about how his, he saves 90% of his income. And so really he's only spending 10%. So that's the part. So inflation is increasing costs of goods and services. So in his situation like the increasing cost of goods and services, he's really only about 10% of his income.
Speaker 2 00:19:13 And so that's not, it's kind of a different situation than if you're spending everything you make. Then you're very much more focused about the actual price or cost of those goods and services. Um, whereas like the white coat investor is like thinking about, okay, if I'm saving 90%, how susceptible are those savings to inflation? And you know, maybe less concerned about the fact that cars are 10% more expensive or whatever. On the other end, if you're spending a hundred percent of your income, you're gonna feel that inflation of, you know, the car prices and gas prices and travel prices much more. And it's going to have a bigger effect on you just being that you're spending a higher percentage of your income. And then a secondary factor is where do you spend? Uh, some, like I said, some categories are more susceptible to inflation than others.
Speaker 2 00:20:10 And so you can kind of like start to customize your own inflation rate. It's your susceptibility to inflation. So if you are, um, I guess either way, a good thing to think about is at minimum, your compensation needs to keep up with inflation. That'll kind of keep things square. So at minimum that'd be something to keep an eye on. Like, especially if inflation gets high inflation is kind of like sneaky because you know, it just devalues your money without if you're not paying attention to it. You don't really notice it until, you know, a period a period of time has gone on and you're like, oh no, things are more expensive and I'm not making any more money. So as long as your income keeps pace with inflation, it's all kind of squared up to where you should be fine, but I could totally see it happening where employers are like lazy about like, let's say inflation stays like five, six, 7% range for the next 10 years.
Speaker 2 00:21:15 I would totally, I could totally see employers, you know, being slower. They even have incentive. You know, if, if, if their employees are not bringing it up, they're not gonna, you know, maybe they're not going to be so proactive about raising salaries as inflation goes up, or maybe they just stick to their standard. 3% inflationary raises. And most people don't notice, but if inflation is 7% or something, you need to like, make sure at least your compensation is going up by 7% and not 3%. That's just then you're losing ground. And so that's a huge takeaway is especially if inflation stays higher, um, you know, at minimum companies to be going up by that inflation level and then your assets. So that's the other big piece of the equation with inflation. So going back to white coat investor, he saves 90%. So he's going to have a lot of assets that he's building up.
Speaker 2 00:22:06 So the question is like, how susceptible are your assets to inflation? Like based on where you're putting them, are they going to keep track with inflation? So your salary, like I was saying before, you can just ask for pay raises or, you know, be more productive in your business so that it keeps pace with pace with inflation, but your assets are kind of a different story. So there's different types of assets that it kind of depends on the assets. So that's when people start to talk about inflation hedges, I'm sure you've heard people say, you know, what's the best inflation hedge. What they're really talking about is how do you keep your assets to, you know, avoid being depleted by inflation? So I'll talk about like the two extremes, so cash just like cash in a savings account or no, even worse cash in your safe, like just sitting in your mattress, whatever, you know, just cash in hand.
Speaker 2 00:23:09 That's like the worst asset when as inflation goes up, uh, because basically so inflation is when prices increase, which in turn makes your dollar worthless. So if you just have dollars, like sitting like literal hard dollars, they're by far the most susceptible to inflation and the higher it goes, the more susceptible, the worse off they are. So going back to that, like rule of 72, if you have, let's say it's high inflation period, so 12 or, sorry, sorry. It's 12% inflation prices double every six years or another words. Your cash is worth half as much as it was before, after six years, because it doesn't do it. Doesn't change at all when it's just sitting in cash. So even cash in a bank is very susceptible to inflation. Uh, you should get some return. Um, this gets in as far as what your interest is on that account.
Speaker 2 00:24:16 That's kind of another can of worms like interest rates theoretically should start to rise as inflation rises. They haven't yet. But if inflation kind of sticks around for awhile, like theoretically your savings account starts to pay higher interest rates. As interest rates go up that doesn't necessarily have to happen. It's not happening right now in this moment in time, but that will help a little bit, but historically savings accounts are going to pay less, you know, a lower interest rate than inflation. So if your in, if your savings account is only paying 1% and inflation is 10%, like you're essentially losing 9% value per year. So that's like a big hit on your money. The other extreme of the spectrum, um, like investments in particularly like stocks. So when you're buying stocks, let's say like, apple is a good example. Like you're when you buy apple stock, you're essentially just buying a share of ownership of company.
Speaker 2 00:25:19 You're a stock holder or owner of the company. You're you have a fractional ownership of that given company. And so you participate in the profit and price change of apple as a company. So apple is like, you know, a smart, versatile company. So as prices rise say, inflation stays around and goes up. Apple's just going to raise their prices to keep up with inflation. And it's gonna, there'll, there'll be able to keep pace with inflation, you know, and still maintain profitability. Theoretically, I guess some companies would be more susceptible than others, but in general, a company is, can be versatile and can adjust pricing. And they're going to be able to reap, you know, in some ways the rewards of the price increases by just charging more for their goods and services. Um, I would say that on average, a good company can like at a minimum, keep pace with inflation and keep things the same.
Speaker 2 00:26:19 Now, some companies might be able to better weather the storm, but in general, stocks are like an exit excellent place to have your money, uh, in a long-term inflationary environment relative to cash, especially because they're going to be able to like navigate it by charging higher prices. And so there's a, there's a lot of different, uh, examples in those. Um, if you want to dig into the weeds of, um, you know, inflation hedges and that sort of stuff, all linked to this by code investor article, he definitely gets into some of the, um, specific specifics of that. But, um, I think the gist of it for like, for those of you listening, I think the most important thing the takeaways is, you know, just kind of understanding the basics of what is happening and just paying attention to inflation is a good thing. You don't have to like, like, understand exactly what's going on, but like general awareness is always good.
Speaker 2 00:27:22 Like things like market factors, insulation being one of them. And so making sure, sure, like I mentioned already, your compensation is at minimums, keeping pace with inflation, or if you run a business or provide services, making sure those services are keeping pace with inflation so that you can continue to earn at least at the level of inflation and then with your assets, like making sure you're as efficient as possible. So going back to the cash example or investments, I said, cash is a terrible place to have money for weathering and inflation high inflation period. But that doesn't mean you should have no cash. You still, it's still wise to hold cash for like rainy day and, you know, short term expected purchases, but it becomes is more important to not have too much cash out. We talked a lot of people that have, you know, more than enough cash, maybe they don't realize it, or maybe they just are cautious about it, but those type of situations, you get penalized more when inflation gets higher.
Speaker 2 00:28:40 Um, so it's, it becomes more important to really have a welder find cash reserve plan so that you can know when to shuffle your money, money out of cash and more into investments so that it can keep pace with inflation and hopefully exceed inflation. Uh, so it's, it becomes if inflation stays high it's it becomes exponentially more important to have a good cash reserve plan. That's good to do anyway, but this makes it even more important. And then on top of that, like just setting on cash, that's always, I, I tend to discourage like having too much cash and you know, a lot of cash just like in your house or in your safe or whatever this will, if inflation goes up or as it goes up that will make that even worse. Like it's going to penalize that, those sort of people even more so, uh, that liked to hold cash on hand.
Speaker 2 00:29:35 So definitely thinking about that. And then with your investments you don't need, I don't think it's a good idea to like time the market or make predictions like I'm talking about inflation right now. It has gone up a little bit. I have no idea what it's going to do in the future. It could go right back down to what it was before and it's people stop talking about it. It won't be, it won't be a big deal. We'll kind of go back to the trends from the past 10 or 20 years, or it could go high. It could go really high. Like I have no idea what it's going to do. And most people that act like they know, so what is going to do really don't know what they're talking about. I mean, they act like they know what they're talking about, but if you hold them to their predictions, they typically are wrong.
Speaker 2 00:30:22 And, you know, especially the on average. So be careful with, uh, short-term predictions about things that are for the most part out of your control. And you kind of just have to weather the storm. Ideally your financial plan has already incorporated the fact that we don't know what's going to happen. So, so with investments, it's generally good to, um, have your money work for you and utilize investments. Um, even if inflation is low or high and it's, it's really good to have a solid cash reserve plan, even if inflation is low or high. And so ideally you already have a good solid investment plan where you know why you're investing w why you have as much stock as you do. What percentage of stock do you have? Why do you hold that much stock? And it should be tied to your circumstances. Like I'm going to buy a ticket I'm in 20 years or retire in 15 years and need to live on 200,000 a year.
Speaker 2 00:31:29 And this is why I have 75% stocks and 25% bonds. So that's your situation. Ideally, your investment plan is based on your situation and is maximizing efficiency for all sorts of varying circumstances. Cause over those long periods of time, we don't really know it's going to be high inflation for awhile. It's going to be low inflation for a while. So go up and down and up and down. And so ideally you've kind of positioned your investments to be as efficient as possible in all sorts of unpredictable markets based on your goals and your situation. And so that's always important. Um, I think you will be potentially penalized with an inflationary environment if you haven't done that more so than normal. So at the end of the day, you know, it's about having your personalized game plan and then sticking to it. So the other thing with it, you need time, things get like a little, I guess, concerning or feeling urgent like this.
Speaker 2 00:32:33 When you start to hear catching news stories or tantalizing like headliners, that's always like ripe for, you know, scams and people trying to sell based on the fear, because at the end of the day, most of the time, this is all like fear base. So it's like, how do you protect your assets from how you avoid losing all your wealth due to hyperinflation? I mean, that's just kind of a headliner, like, you know, in your circumstances, you should be really focused on avoiding like the noise with all that sort of stuff and being kind of keeping your eyes out for like people trying to manipulate you based on a given circumstance. So inflation, inflation, it's definitely, um, it's just kind of a thing it's not necessarily, as long as you're you have a good plan and you're, you're, you, you're being efficient with your money and you've taken into consideration these things.
Speaker 2 00:33:35 Um, it's not necessarily going to hurt you and you definitely should not be making big short-term moves based on the prediction of inflation, especially if somebody else is trying to convince you to do it. And especially if they're making money by you doing that specific thing. So definitely watch out for that kind of stuff. They always seem to crop up, especially if this gets heated up more and that'll, you know, that can put you in a much worse position. So yeah, that's kind of the story, uh, with inflation, hopefully, um, this has been helpful. If you want to understand more about inflation specifics, definitely check out. Why could investors article on it, feel free to throw out questions that you have or circumstances that, that, um, or scenarios you can think
Speaker 1 00:34:27 Of. Um, I'd be happy to, to
Speaker 2 00:34:29 Chat about that or we can chat over email. We'll look forward to chatting with you next
Speaker 1 00:34:35 Time as always, thank you so much for joining us today. If you found this valuable, please give us a review on iTunes and share with a friend. Also check out our
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