Inflation-Proof Your Money: The Power of Measuring Backwards

Four glass jars, with increasing amounts of money. Inflation-proof your money.

Is it possible to completely inflation-proof your money and assets? Inflation is the “silent tax”. After all, since inflation represents the purchasing power of money, it’s an economic phenomenon that doesn’t discriminate. By this, we mean that there’s no way to come out unaffected. It is, however, possible to run alongside (or even outpace) inflation. 

What does this mean? Well, first and foremost, if you want your dollars to have more impact, you have to have more dollars. The simple answer to the problem of inflation is simply to earn more money. One hundred thousand dollars may be a comfortable income for you now, yet based on current inflation projections, you could need $350,000 for your income to feel the “same”.

The issue is that many people simply cannot relate to this idea of inflation. It seems impossible that our money could ever inflate as much as it is predicted to do, even when we're experiencing it. This is why you should learn how to “measure backwards” and encourage clients to do the same. 

Measure Backwards with Historical Financial Data

The human brain has no ability to relate to inflation when we look forward. We can look at projections all day and still not fully comprehend what that future looks like. We can, however, pull from our memory and historical financial data. When we do this, we’re looking at real and tangible information. Measuring backwards helps us to make actual sense of how inflation affects our dollars. 

For example, if you look back at income data, rather than forward, you see the actual proof of inflation. The numbers aren’t projections, they’re facts. And no matter your age, it’s simple to think back a decade or more to the price of gas, groceries, cars, and homes. 

Historical Financial Data: Wages 250 Years Ago

The University of Missouri’s Library has an online database that can help us do just that: measure backwards. While they have many decades of data available, let’s consider what wages were 250 years ago. 

From the database, let’s look at pay charts from the US Navy. In 1870, a warrant officer in the Navy with 12 years of service under his belt earned $150 a month when at sea. He’d earn $133.33 a month when on shore duty. Today, a warrant officer with over 14 years of service earns between $5,317 and $6,907 a month. 

If we plug that into a rate calculator, you can see we’re looking at an annual inflation rate of 1.42% over 252 years or 3,024 months.

Using a Rate Calculator to show the inflation rate of our historical financial data.

What the Inflation Data Shows 

While that’s not an extreme inflation rate, it certainly makes a significant difference. What’s critical about this information is that today, the average person spends about 50 years working. If you remain in the same job, your income should increase naturally over time. However, people are not always adjusting their savings habits and “retirement” goals accordingly. They assume if they have $100,000 today, that's what they'll need in the future.

Someone who makes $100,000 now is likely building their retirement strategy around that figure. However, if they were to retire 50 years from now, they’d need a significantly higher annual income for it to “feel” the same. 

If you use the same 1.42% rate we found earlier, you can see that in 50 years, you’d need an income of $202,386 to have your income feel like $100,000 in today’s money. This means you must save money with inflation in mind. However, one of the few effective ways to combat inflation is to make, and save, more money. 

Using a Future Value calculator to show how inflation affects income. Inflation-proof your money.

Two Inflation-Proof Assets

When the value of the dollar decreases, costs go up. That’s inflation. While this can seem overwhelmingly negative, there are actually two major assets that improve over time because of inflation. That would be whole life insurance premiums and mortgage payments. 

The reason these improve over time is that mortgages and whole life premiums are fixed payments. They do not increase. This means as time goes on, the payments have a lower impact on your bottom line. 

Let’s dissect how this works with a mortgage. Say you pay $1,500 a month for your home. If we use the same inflation rate we’ve been using, we see that at the very end of the mortgage, it’s going to feel like $653. 

Note: The reason we use a Present Value calculator is that we’re trying to work backward to find out what the mortgage payment would feel like in today’s dollars. 

Using a Present Value calculator to show how your mortgage is an inflation-proof asset.

Whole life insurance is such a valuable asset because not only do your premiums feel like less and less over time, they’re also designed to grow with certainty. You won’t lose money from your cash value, and the interest and dividends are ‌an improvement from a typical savings account. Slow and steady wins the race. 

Inflation-Proof Your Money with Whole Life Insurance

If we can get clients to understand the value of having a premium that improves with inflation, and also out-earns a typical savings account, we can help them inflation-proof their money. This method is built on the contractual guarantees of whole life insurance, as well as a solid history of mutual companies paying dividends.

While it's difficult to recognize what inflation will look like in the future, pulling from our past improves our understanding. This is especially true when we show clients illustrations in Asset Flow that may span 50-100 years. If you struggle to convey the real effects of inflation this way, help your clients measure backwards with historical financial data.

To get a better understanding of the Truth Concepts software, we invite you to attend a 3-day Truth Training event. Here you'll learn how to effectively share financial concepts with your clients using our calculators. This training is live and in-person, so you get the best learning experience possible. If you're not yet using Truth Concepts, you can download a free trial today to see how it can help your financial practice.