By Stephen Buller
Since COVID, the cost of living has been increasing at rates not seen for decades. Depending on your circumstances, this could be catastrophic, no big deal, or even beneficial to your overall wealth. For the average person, there is no better time to get serious about a personal budget.
Before we get to a simple budget concept anyone can apply to their life, let’s address the main reason things are getting more expensive. There are myriad factors, but number one is the inflation of our currency.
The natural state of the world is one of decreasing prices. You heard me – things should be getting cheaper. This is because we build better tools and processes to create goods as our understanding deepens over time. Think of the first supercomputer compared to today’s iPhone.
It’s important to compare apples to apples, and saying a Tesla Roadster today should cost less than a Honda Civic last year would be unfair. But recognizing the nuance in comparing one car to another gives insight into one of the ways the government manipulates the official cost of living through “hedonic” adjustments.
Do you ever feel like products aren’t getting any better – in fact, the quality may be going down – but they’re just adding features no one really needs? If the exact same make and model car increases $1,000 in price from one year to the next, the government may judge the addition of eight more cup-holders as increasing the value of the vehicle, so – using a “hedonic” adjustment to compare apples to apples – there was really no increase in cost. You paid more for a better car.
This is one reason why the official cost of living – the Bureau of Labor Statistics’ Consumer Price Index (CPI) – doesn’t seem to reflect reality in your life. The other major reason for this divergence is the exclusion of food and energy costs from the CPI – as if people don’t need to eat or commute. For this reason, I look at shadowstats.com, which simply measures the CPI using the method the government used prior to 1980.
Since the year 2000, the Social Security Administration’s cost of living adjustment has averaged 2.6% per year, compounding to a total increase of 88% in 25 years. This is the number they use to determine increases in social security payments to seniors. In that same time period, the shadowstats measure averaged around 10% per year …
If you’re retired and living on a fixed income, this is a big problem. If you’re still working, you haven’t seen a real wage increase in 50 years, so it’s almost as big of a problem. How are you supposed to keep up, let alone get ahead?
The secret lies in where I started, the inflation of our currency. If currency is created, usually through banks creating loans, those dollars must go somewhere. The reason we were able to print trillions of dollars for decades without seeing the grocery bill skyrocket is because those dollars went into stocks, bonds, real estate, cryptocurrencies, and other investments.
Also since 2000, the S&P 500 has increased more than 300%, the U.S. bond market over 200%, and the median-price home around 150%. Cryptocurrency was only a concept at the turn of the millennium, and today the global cryptocurrency market cap is nearing $4 trillion.
Maybe all these markets will crash and revert to the mean tomorrow. Maybe one of these times, the U.S. government will no longer have the ability to print trillions (or quadrillions, as it may be) to reinflate the bubbles. When that happens, our world economy will suffer a massive debt implosion larger than any in the past.
I would love to live in a sane world where these levels of price distortion are impossible. Then I remember, “Markets can remain irrational longer than you can remain solvent,” a quote attributed to John Maynard Keynes, the famous economist who championed the insane economic policies that have led us here.
What’s the solution? More debt. Sorry, that’s not a great solution. But it’s the one our government will most likely choose, and the one you’ll be presented with. Lower interest rates, longer-term loans, anything to heap debt on you by drawing your attention to your monthly payment instead of the true price you’ll be paying, most of which will be interest to the bank.
What do I think the real solution is? We have to hit both sides of the coin: 1) Budget realistically in our daily lives, and 2) Invest steadily for the future. One strategy for hitting both of these is the 50/20/30 budget rule. I like this one because it’s similar to how I budget a business.
First, add up all your fixed costs, things like housing, auto, food – the items you can’t live without. The goal is to cover these with 50% of your after-tax earnings. You then put 20% towards savings and investments. The remaining 30% is for everything else, including guilt-free spending because you’re being responsible in the other two areas.
If you find your housing and auto costs alone are more than 50%, in the short-term, I would allocate some of my 30% bucket to those expenses so I’m sure to continue to save and invest for the future. In the long-term, I would look to increase my income and decrease my costs. Debt has a role to play, but if you find yourself using loans, credit cards, and buy-now-pay-later more and more, you are living above your means.
The most important bucket is putting 20% to building an emergency fund and investing for the future. If you aren’t currently doing this, I encourage you to research the power of compounding. The sooner your start, the better. I’ll have more on savings and investment next month, so tune in. Your future self will thank you.
