- Kevin McCollester
Your Money Will Never Be Worth More Than It Is Today
Updated: Oct 16, 2019
Do you believe that the value of your money today will never be greater than it is right now? Let's take a look.
As prices rise over time, it takes more money to buy the same goods and services. Likewise, if prices fell over time, it would take less money to buy the same goods and services. We live in an economy that is inflationary, meaning that in general, prices of goods and services rise over time. Inflation in the U.S. economy is measured by the Consumer Price Index (CPI) and for the last 60 years it has averaged 3.7% with the lowest annual rate being 0.09% in 2008 and the highest being 13.29% in 1979. Taking the average over this 60 year time period, due to inflation, goods and services that cost $1 in 1957 would cost $8.85 today, meaning that it takes 8.85 times as many dollars today to have the same buying power as you had in 1957. Your dollars lose buying power over time. $1 in 1957 is only worth 11 cents today.
As long as the economy continues to experience inflation, your money will never be worth more than it is today!
So what does this mean for our finances? Let's look at one example. Conventional thinking tells us to pay down our mortgage as quickly as we can or that a 15 year loan is better than a 30 year loan. But let me ask you this, since your monthly mortgage payment (principal and interest) is the same every month over the 30 year life of a mortgage (assuming a 30 year fixed rate mortgage), would you rather make your mortgage payment with today's dollars or with dollars in the future that are worth less than they are today? But I will pay less interest by paying off the mortgage more quickly you say. That is true, but let me ask this question. How much money is your fully paid off house earning for you? Your first thought is that it is earning the rate of appreciation in real estate prices over time. But is that really true? If home values are increasing 3% per year, does the real estate market care whether your home is paid for? No, of course not. Your home value will increase the same regardless of how much you owe on your house. So to answer the question of how much your fully paid off house is earning you, it is ZERO. It is earning you NOTHING. It is just tied up in a house, the same as if you stuck that money under your mattress. And you used more valuable dollars to get you there.
Having your money tied up in a fully paid for house not only means you used more expensive dollars to buy your house, it also prevents you from earning a rate of return on that money. Might it be better to earn a rate of return on your money and use cheaper dollars to pay off your mortgage? We can look at the specifics of your current situation and run the numbers and see if you can do better by thinking differently.
#Inflation #BuyingPower #Mortgage #AlternateInvestments #OpportunityCost