- Reader Case: Military Family Nearing FIRE - October 15, 2021
- It Just Got Easier to Have Your Student Loans Forgiven - October 11, 2021
- Reader Case: Can I Retire on an Office Administrator’s Salary? - September 27, 2021
After last week’s distraction, it’s now time to return back to the topic of Inflation. We last discussed it 2 weeks ago when we did an article on macroeconomic inflation. Today, we’re going to talk about personal inflation. New readers, please click here to start from the beginning.
Recall that macroeconomic inflation is what newspapers talk about when they refer to “Inflation.” But how is it measured, and how does it actually affect your day-to-day life?
Inflation is measured using the CPI, or Consumer Price Index. Basically, this is a basket of goods that the government makes up, and consists of day-to-day items like bread, milk, gasoline, education, stuff like that. The CPI tracks the price of this basket of goods and uses that as a proxy for how the cost of your everyday life changes from year to year. If the CPI goes up 2%, then your own personal cost of living should go up about 2%.
This is of course, a lie. And we will demonstrate with real world numbers.
First of all, the CPI assumes that each person will blindly buy the items in the CPI in the exact same proportion regardless of price. A SMART consumer like the readers of this weird little blog would never do such a thing. If bread got expensive, we would switch to rice. If gasoline got expensive, we would switch to electric cars.
Hell, the entire PREMISE of this blog is that housing (which is part of the CPI) is too fricking expensive, so rather than blindly buy like it anyway like a buncha goddamned morons, we rent instead. So we know that Behavioural Modification can act as a buffer between the CPI and your own Personal Inflation.
Let me give you an example. A few years ago, the transit workers in Toronto (known as the TTC) went on city-wide strike demanding higher wages. It should be noted that at the time, it was reported that some were already making around $80k-$100k as a BUS DRIVER so you can imagine how this went over with the general public. As city hall and the TTC fought with each other, it became clear that a big, deeply unpopular fare hike was coming.
Well, that big, deeply unpopular fare hike did come, hiking TTC fares by somewhere around 10% (if memory serves), and since transit is something that everybody has to pay, that should have had a material impact on our budget, resulting in that dreaded Personal Inflation.
Instead, we gave the TTC the ol’ middle finger and decided to jog to work instead. And FIRECracker, being FIRECracker, quickly turned it into a competitive sport, seeing how quickly we could get to work and then the next day trying to beat that record. Pretty soon we were getting to work in around the same time, even including the time it took to shower/change because we avoided all the constant subway delays that are part of the classic Toronto experience. PLUS, we were able to cancel our gym membership as well. What’s the point of running on a treadmill when you jog 7 km each and every day?
So somehow, when everyone’s budget went UP due to inflation, ours went down.
But let’s not forget Location Independence! One of the biggest advantages of becoming FI is no longer needing to work. Which means you no longer have to live in the city based on where your job is. Which means you can live anywhere!
And I know, I know, maybe not everyone wants to move too far from their friends and family, but consider this. According to cost-of-living calculator Numbeo.com, the average rent in downtown Toronto, which is where I used to live and work, is $1600 a month. Meanwhile, the average rent in downtown Kitchener, which is an hour and a half away and where I used to go to school, is $960 a month. And considering my ACTUAL rent in Toronto was just $850 a month, I could probably find a WAY better deal in Kitchener if I wanted to move there.
And that’s not even counting the lower costs of all the other stuff, like food, beer, eating out, etc. All that other stuff drops too, and if you ever want to hit up downtown Toronto for the occasional night on the town (or to visit friends), that is one train ride away. How many people out there commute an hour just to get to work? Do that shit every day and it sucks ass. But a train ride once every other week? It’s kinda fun!
This was a very Canadian example, but other Early Retirees have discovered the exact same thing. Here’s Mr. Money Mustache’s realization that he could get all the benefits of living near Boulder, Colorado without actually being in Boulder, Colorado. And believe you me, that guy knows a thing or two about Early Retirement…
Location Independence: Personal Inflation Killer Extraordinaire!
Oh Boy, NOW we’re talking!
Here’s the thing about inflation that nobody out there seems to understand: It’s country-specific.
Just because inflation in Canada, or the US is a comfortable 1-3% doesn’t mean a thing about inflation in another country. Deflation in the Eurozone can exist alongside healthy inflation in the USA, and Hyper-Inflation in Venezuela can exist alongside a multi-decade deflationary slump in Japan.
In fact, Japan was especially baffling. Long having a reputation as an “expensive-ass country to visit” (technical definition), we were shocked that we were able to find AirBnB rooms renting for just $59 CAD a night in Tokyo. TOKYO! Specifically, near the Shinjuku ward, known throughout the world as “the place where all the weird neon girls, flashing lights, and crazy robot shows live.”
And this is because that decade-long deflationary spiral was a combination of city real-estate over-building and a declining population. Those two factors has resulted in a surprisingly reasonable rental costs, even in the middle of Tokyo.
And while we’re on the subject of foreign countries, we come to the last factor affecting Personal Inflation…
Foreign Exchange (Forex)
Now before all you Forex junkies start panting all over me, let me be clear. I am NOT advocating Forex trading. Forex trading requires you to predict and trade on future movements of certain currencies against other currencies. That is insanely risky business, and unless you have a bank of supercomputers analyzing real-time news stories backing you up, you shouldn’t do it.
But where I WILL take advantage of Forex is in picking a place to live.
Now, I don’t know how many of you are tuned into the news, but the US just elected a new president. Who is he again? I forget his name…
Anyway, whoever this person is, it’s no secret that he isn’t a fan of Mexico. He wants to rip up NAFTA, deport all the Mexicans, and build a giant wall along the US’s southern border.
All this has caused a sudden sharp decline of the Mexican Peso (MXN) against the US Dollar (USD). Which has in turn caused a sudden sharp decline of the MXN against the CAD. Which means it’s NEVER been cheaper to visit Mexico!
Because of Forex, we ended up spending a few months in Mexico, and while we were there we were regularly able to find places renting for $535 CAD a month. That’s $400 USD for our American readers!
So bringing this whole discussion all together: Inflation. It exists. You have to understand it. You have to invest to account for it. But you don’t have to play by its rules.
Your personal inflation can be changed using Behavioural Modification, Location Independence, Country Independence, and Forex.
Put all this together and you can build a portfolio that will grow with inflation, allowing you to maintain your purchasing power in your home country, while giving you the tools to freeze or even lower your cost of living using the methods we outlined below. When we were living in Toronto (and when we did our initial trip around the world), we spent about $40k CAD a year.
Now that we’re travelling, staying in low-cost countries, and taking advantage of Forex, our spending has gone DOWN to around $32k CAD a year.
Yes, that’s right. Even with inflation running 1-3%, our Personal Year-Over-Year Inflation is actually -20%.
And that is how we make Inflation our bitch.
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Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.