Financial Literacy is Financial Freedom
In 1999, the game show Who Wants to be a Millionnaire aired and attained massive popularity. Trivia buffs around the world salivated at the chance to retire early with $1M.
In 1999, $1M seemed like a lot of money. You could put it in a 5% CD and live off the annual interest.
Today, in most of the developed world, $1M would not be secure to retire early on. $1M cannot even buy a house in major metropolises around the world like Sydney, Shanghai, New York, and the US west coast.
What Changed?
The reality is that the value of the US Dollar, and every other currency around the world, has depreciated over time due to inflation and monetary debasement.
Even though official CPI is 2% since the 2000s, most metrics of the real rate of inflation is at least 5%. If we use an alternative 1980s-based formula, or the Chapwood Index, then real inflation would be over 10%.
Our savings continue to lose value because central banks continuously debase their currencies by inflating the supply, aka “printing money” out of thin air. Whether it’s the USD, the Yen, or the Euro, the geopolitical system in most nation states are incentivized to expand their monetary base in order to keep the economy from imploding.
If you’re in a first world country, your savings will lose purchasing power every year at around 5-10%. If you’re in a 3rd world country, you have the privilege of experiencing 50%+ inflation in places like Turkey and Argentina.
The equivalent of $1M in 1999 would be at least $3M+ today.
The Financial F-Word
If the winner of Who Wants to be a Millionnaire in 1999 invested in a savings account, which derives its yield predominantly from government bonds, their interest rate would have dropped from 5% to <2% over the decades. They would not have kept up with monetary debasement, and therefore would have lost over half their nest egg!
If the winner of Who Wants to be a Millionnaire had invested properly in 1999, they would still have financial freedom today. Even if they used a simple strategy of investing in the S&P at the peak fo the Dot Com bubble, their investment would have tripled over the ensuing 20 years.
Financial freedom is not about achieving $1M or some magical arbitrary number. It is about knowing what that amount is over time, and finding the best strategy to maintain a monetary store of value.
The more you understand macroeconomics, the more you realize that financial freedom is really financial education.
