Great things happen when you listen to your kids and follow the conversations that THEY want to have!

 I recently took my son Nathan to buy some new school clothes and he asked a question while we were driving home.  He had noticed how expensive the clothes were and asked how much more they would cost in 50 years (because of inflation).  He’s been hearing about inflation and at least understood that it causes prices to go up.

He then asked, “Why do we have inflation anyway and what exactly is it?”

 I love these moments!   When our kids ask us questions, I know their mental “window” is open and that I have an opportunity to help them learn and grow!

 So, I had to explain inflation in simple terms without any prep time!   Here’s how I explained it.

• Paper money was originally used to represent an equivalent amount of gold.  The government could only print a $1 bill if they had $1 worth of gold in a vault to back it up.  This was the “gold standard”.
• The United States abandoned the gold standard in 1971 and that allowed the government to start printing money without having the gold to back it up.
• As a recent example…. After the onset of the COVID pandemic in 2020, our government created trillions of dollars out of thin air and even sent checks directly to US citizens.  Over 40% of the current money supply was printed between May 2020 to May 2021!
• This massive increase in the money supply has caused inflation rates to soar over the past 18 months.  Average historical rates are about 2% per year.  In 2021 the average annual rate was around 5% and in 2022, it will likely be around 9%.

The conversation then went like this:

• Me: “What do you think happens when everyone suddenly gets a “free” check from the government?

• Nathan: “They probably go spend it!

• Me: “What do you think store owners do when there is a sudden increase in demand for their products?”

• Nathan: “They probably raise their prices!”

• Me: “Exactly!  And that’s why the purchasing power of a dollar is nearly TEN times less now than it was in the early 1970s!  (See this article for charts and an explanation).

He got it!  I was then able to take him a bit further and tie the conversation into saving and investing….

• Me: “Let’s assume the inflation rate from 2020-2021 was about 10%.   If you had $100 in your piggy bank when COVID started, what’s it worth now?”

• Nathan: “Probably less since everything is more expensive now.”

• Me: “Exactly!  Your $100 is worth about $10 less, so essentially it’s only worth $90 now. “

• Me:  “And what do you think happened to the $100 I invested into apartments at the beginning of COVID?”  (Keep in mind that he’s been listening to me talk about apartment investing for the past five years)

• Nathan: “It’s worth more?”

• Me: “Yes!  An apartment’s value goes up with inflation, and my $100 has gone up more than 15%!  I’ve also been receiving passive cash flow from the investment, and that’s on top of the increased value!”

At 11 years old, Nathan now understands inflation in a way that I didn’t understand until I was 45!  To date, he’s already “invested” about $200 of his own money into our apartment deals and he NOW understands the TRIPLE benefit of investing his money into apartments – 1) his money isn’t devalued by inflation, 2) he receives passive cash flow,  3) he gets double-digit annualized returns once the deals sell!

Inflation and the Federal Reserve’s control of our money supply are no doubt complicated topics.  But understanding inflation at a very basic level can help everyone protect their money against devaluation.  

By investing your money into hard assets (like real estate) rather than keeping your money in a savings account, you can avoid (or at least mitigate) the erosion of your money’s purchasing power over time!  I now understand that….. and so does my 11-year-old!

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