So far we have covered two of the four key financial elements that
Robert says make 90% of people poor: debt and taxes.
This month will cover inflation, which is the increase in prices over time that causes the purchasing power of money to decline.
Like the other three elements, inflation is something that has the potential to financially wipe you out.
However, it can also help you become very wealthy-if you have a high financial IQ like the truly rich do.
Inflation is an unavoidable fact of economic life.
History is an important teacher, and history teaches us that
there have always been, and there will always be, booms and busts in the economy.
Essentially, whenever you invest, you're investing in business.
And business goes through a cycle. Inflation (expansion) and recession (contraction) are the recurring phases of the cycle,
measured by certain economic indicators such as the gross domestic product and the unemployment rate.
If you know where the country is in the business cycle, whether it's expanding or contracting,
you'll be better able to determine how the businesses you've invested in are performing.
Any financial plan you put in place for yourself should take inflation into account.
Inflation mostly hurts those living on fixed incomes, such as Social Security payments (in the United States) or pensions.
It's also detrimental to those whose savings are tied to fixed interest rates, such as savings accounts or bank certificates of deposit,
unless of course the fixed interest earnings exceed the inflation rate.
But inflation isn't always bad. High inflation usually favors those who owe money.
Each year that a debtor makes payments on a fixed loan, he or she is repaying it with dollars that have declined in value since the previous year.
Sometimes inflation can even help create wealth, especially when investments increase in value faster than the inflation rate,
as can happen, for example, in real estate. If you have good debt (debt that makes you money such as a rental property that has renters in it),
then with high inflation you will find that you are paying back that debt with inflated dollars, while still controlling the cash flow of the asset!
Economists have a formula called the Rule of 72. The Rule of 72 can tell you how long it will take for the money you are saving or investing to double.
It also can help you figure out how long it will take for prices to double-a valuable guide when assessing the possible impact of inflation on your investments.
The Rich Dad program encourages you to learn, through financial literacy, how to increase your wealth in a down as well as in an up market.
Taking the Next Step
If you would like to learn more about the Rule of 72 and how you can make inflation work for you,
check out Section 2, Pillar 1 of the You Can Choose to Be Rich course on the Rich Dad World site.
Remember that as a member of Rich Dad World, this is completely free to you.
Also, remember that as a Rich Dad World member, you have an opportunity to receive a free introduction to see how working with one of Robert's certified coaches can help you make inflation your friend instead of your enemy.
To your success,
The Rich Dad Coaching Team