Inflation isn’t a bad thing – for investors its a gift.
It’s time to slaughter a sacred cow and put it to rest.
It’s that inflation’s a bad thing.
Sure it has its problems but for us investors it’s a gift.
I know you might be sceptical, so here’s 3 reasons why you might wish for higher inflation in the future.
Reason 1. Inflation pushes up the value of your portfolio.
If there’s, let’s say 5% inflation then everything, on average goes up 5% each year. This is before any of the other factors like supply and demand come into play. If you’ve got a one million dollar portfolio, you’re $50,000 up each year thanks to inflation alone.
Reason 2. Inflation pushes up rents
Just like with house prices, inflation also increases rent. When inflation is high, rents go up faster. And the more rents you’re collecting the better off you are.
Reason 3. Your bank loan actually shrinks Your bank loan is not indexed to inflation, which is brilliant.
So while the actual dollar amount stays the same, over time the ‘real’ value of an older loan gets smaller. For example, 10 years ago a $300,000 loan was a lot. Nowadays it’s not so bad. In 10 years’ time it’ll be considered small.
Let’s look at it using Mars Bars. Right now a Mars Bar costs about $2. It’s a bit less, but let’s pretend OK?
However, 10 years ago a Mars Bar cost $1.40. So your $300,000 loan was the equivalent to 214,285 Mars Bars.
So far so good?
Today at $2 it’s only 150,000 Mars Bars.
In 10 years’ time, thanks to inflation a Mars Bar might cost $2.70. And your loan will be worth only 111,111 Mars Bars.
Change Mars Bars to currency and you can see how the value of your loan comes down.
And while everything else goes up, your home loan stays the same. The banks can’t increase it with CPI.
Back in the 1970s a $20,000 home loan was huge. Nowadays people get personal loans that size to furnish their house. It’s still $20,000 but that $20,000 is worth a lot less now.
So you can see why the investor in me loves inflation. The higher the better as far as I’m concerned.
When you’re holding property you should love inflation too.