The 3 Reasons that hinder your wealth growth.


Years ago, famous Investor and best selling author Robert Kyosaki (his "Poor Dad - Rich Dad" series of books comes to mind) wrote:

"It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for".

Let's compare your wealth to a plastic bag you are tryng to fill up with water (where water=Money).

You might not have noticed but the plastic bag you are carrying has an unnoticed hole at its bottom leaking water as you walk. Yeah this year the bag is slightly fuller, but that is just because you poured in more water than it leaked out and, after you did, the leaking is still happening. Eventually your capacity of pouring water might diminish but that hole will grow in size. 

What am I talking about in real terms?

3 things basically:
  • Erosion of your future wealth by inflation.
  • Erosion of your future wealth by unrealized gains.
  • Erosion of your wealth by unforeseen "unfriendly events".
In my next 3 posts I will examine all of them starting today with inflation.


Inflation.

Let`s say you have $100.000 and you want to buy a new car, say for $27.000.
You are now left with $73.000 in the bank as you drive through town in your brand new moving machine, feeling a little impoverished but at the same time mighty satisfied.



You check what you can buy with the remaining $73.000,  but decide to keep the money in the bank.
The next day you go out and the car is not there...ever had that sinking feeling when you open the front door in the morning and wonder where you left it? Did you leave it on the road, park it in the garage... or has somebody stolen it? As it happened to a family in the USA, theirs was swallowed by a 30ft sinkhole which opened just below it in their driveway!

real pic of the hole

I'm pretty sure that if that happened to you, you would get pretty mad wouldn't you? And the reason is, such an event would be so evident and in your face that an immediate reaction is granted.

But let`s just say you don`t touch the money and keep it in the bank for 10 years, you go check your balance and it still says 100.000 (assuming your bank didn`t detract expenses) but when you see the actual purchasing power, you can buy exactly what you could by 10 years earlier with the remaining $73.000! As a matter of fact with inflation set at 3% in 10 years you lose exactly $27.000 of purchasing power due the ill effects to negative compounding.
Yup, your car just fell in the hole and you didn`t even notice...

"But I heard the problem now is deflation not inflation!", problem is, the inflation rates you hear on the news are grossly misguided, as what you see there is a piloted weighted index inside which enters only what "somebody decides" and where all elements do not have the same weight in the average. As you might have noticed yourself, prices are indeed increasing and you can buy less with your money today, compared to a year ago.

But let`s just say that this is really just the tip of the iceberg...

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