Investment Workshop 21: Inflation II: This Time it’s PERSONAL

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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%.

Behold my Microsoft SmartArt Glory!

This is of course, a lie. And we will demonstrate with real world numbers.

Choices, Choices

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.

Location Independence

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, 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!

Country Independence

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…

Herbert Hoover?

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.

Continue onto the next article!


26 thoughts on “Investment Workshop 21: Inflation II: This Time it’s PERSONAL”

  1. Wanderer,

    This is a good post, but Im wondering what your thoughts are on inflation hedging your portfolio. How do you protect your investments from getting depreciated by inflation?

  2. “…unless you have a bank of supercomputers analyzing real-time news stories backing you up, you shouldn’t do it.”

    Well, now you’ve mentioned it, guess what, I do have access to some of the world’s largest supercomputers. Where do I start learning about how to utilize these resources to super-charge the growth of my financial investments?

    (P.S. If you have intensive simulations you want to run, feel free to send them over to me: I can run them for you.)

    1. So you’re either a super-villain or you work in a university. Not that those things are mutually exclusive.

      Actually, the company I used to work for used to make programmable chips and one of our big market segments was High-Frequency Traders (HFTs). These guys would build server blades that analyzed all price movements and news headlines and used that to generate trades, hoping to eek out profits of fractions-of-a-cent per trade, and in volume they’d be able to make millions of dollars.

      And talking to some of them, their competitive advantage against each other in some cases came down to (no shit) physical proximity to the NYSE building. By getting THEIR trades in just a few microseconds in before the other guy, they’d be able to exploit that advantage and make a killing.

      When I realized this, I was like “you know what, FUCK active trading. I will never be able to process information faster than these HFT guys. The only way to win is to do long-term index investing where the HFTs can’t touch me.” And that’s how I became a millionaire.

  3. It is all about making changes when prices rise. I just found out the particular brand of coffee I buy at the grocery store is 40% cheaper on Amazon. The exact same coffee. I stocked up. The savings on the coffee was enough to cover my beer budget for the month.

  4. True, behavioral changes aren’t used in the CPI. It’s based on a basket and the weights in that basket are kind of sticky. Hence, serious analysts would also look at the PCE index. That index accounts for behavioral changes, specifically, consumers shifting away from more expensive goods. But you’ll be surprised how closely the two move together. Accounting for substitution effects creates maybe 0.2% lower inflation in the PCE on average.
    To get a REAL boost in purchasing power you’d have to move abroad, as you very eloquently pointed out in this post and others. 🙂

  5. So smart people who aim to retire at 30 – should we disregard inflation and increase our expected rate of return? Since we are smart enough to make use of technology and constant learning that our costs will be dropping annually instead of going up like it does for suckers.

    Like with me – I no longer pay for haircuts, phone, transit, or entertainment- but I still use all of these. So would it make sense for me to assume let’s say 9% annual return instead of 7%?

    1. What? No.

      You should account for inflation by keeping a majority of your portfolio in equities (as I talked about in

      However, you should still aim for a 4% withdrawal rate to support yourself in retirement. This is the withdrawal rate (adjusted by inflation) determined by the Trinity Study to have a 95% success rate. That’s what you should be aiming for as you build your retirement portfolio.

      My point was that if inflation ends up spiking unexpectedly in your home country, you can use the methods outlined above to buffer that effect on your own personal inflation. That’s all. Nothing I said here should change your return expectations.

    2. Nope. There’s only so much you can optimize before you each a point of diminishing returns with that. I wouldn’t count on it as an effect that can be sustained long term, year after year.

      But what you certainly can do is base your number-required-to-FIRE on your more frugal budget, and decease your time to retirement that way. So this kind of thing has an effect. But investment returns is not the correct value to tweak if you want to account for it…

      …if you WERE going to do something like that, and treat it as a reliable percentage (which is also flawed because: diminishing returns with this over time, but I’ll run with it)…it should be applied to your SPENDING, not your investment rate of return. And it will have less and less effect on your overall finances as your stash grows. For example: let’s say you have $500K in investments and you decide you can expect an increased return of 2%. That translates to $10K extra the first year. But wait! Maybe instead you have a stash of $1 million, which means you can expect $20K extra from this, right? Yay! The bigger your stash grows, the better you must be getting at substituting cheaper things in your expenses!

      …Uh, obviously not. What really happens, when you already have a frugal budget, is maybe you shave a few hundred or few thousand off your spending here and there. Or maybe you move from a high cost of living area to a low one, and save lots more per year as a result of that. But your inflation-offsetting savings from substitution CANNOT scale with the size of your investments, and you cannot logically treat this as a reason to increase your expected ROI.

      Apply it to your spending projections if you must apply it to anything. Personally I’d be really uneasy about expecting myself to find 2% of savings in my budget, year after year, for thirty or forty years. Inflation can be OFFSET by frugality, but it still exists and will have a visible effect on your core spending eventually.

  6. A question about jogging to work. Now that the government has removed the transit tax credit, jogging to work has become a serious option. How often did you need to buy new running shoes? I’m thinking this might end up costing more than a TTC pass (although one would get the added health benefits of exercising).

    1. Once a year. We bought ours on sale for $60-70CAD each (ASICS) at an outlet. Just make sure it’s a durable brand (we prefer ASICS and an older model (latest one is $200, but last year’s model is 1/3 or 1/4 of that). Also, since jogging is part of your workout, you end up saving on gym membership as well. By ditching the pass and the gym membership, ($146/month for pass + $50/month for gym), you save $2352 every year! Even if you need to buy gym shoes every 6 months, that’s still $2232 saved…which would mean you need $55,800 less in your portfolio to generate that income. Plus you get killer calves 🙂

      1. Thanks, will definitely look into getting good deals on running shoes (I’ve read good reviews for ASICS!). I’ve never paid for gym membership (that’s what parks are for) and used to walk everywhere when I lived closer to downtown. Now I live 9 km from downtown, jogging/walking the entire way is a little daunting.

        1. 9km is a nice distance to bike, if running is pushing the limit. I’m doing 20km by bike in about 45 minutes with panniers (which add a lot of drag), stoplights and all.

    2. Hey Mei, did you think of bicycling to work, that’s what I did, I’m in toronto so metrolass is $145, I paid $300 last year for a bicycle on Kijiji and in 2 months the bike paid for itself.

  7. I didn’t read comments yet so don’t know if someone else said this, but the big thing i resent about this post is that a bus driver doesn’t deserve to make 80K/year… In Toronto, where a basic house is $300K. Really? Elitist much? Driving and conducting is a skill that had to be learned, and experience counts just as much there as anywhere else.

    Just saying. Otherwise, I enjoy your posts.

    1. You’re entitled to your opinion. In the private world, income is based on scarcity of skills, not unionization. Sure, learning to drive is a useful skill and they are providing value to the public. But the amount of time and practice needed to learn that skill is far less than a someone else who had to earn that skill through years of gruelling training and experience. There are a much smaller group of people who have those skills, and as a result, supply outweighs demand, diving salaries up. That is why artists get paid less than doctors. That is why bus drivers get paid less than accountants.

      You don’t deserve to demand to be paid an X amount, through unionization, just because “I need to be able to afford to buy a house”. Ownership is a privilege, not a right.

    2. I don’t think anyone ever said anything about bus drivers deserving or not deserving any specific salary, but the whole issue that Toronto dealt with wasn’t that bus drivers were making $80,000-100,000/year. It’s that they were making that and then went on a strike to demand even MORE money. A transit strike can paralyze a city. I can tell you that I would be LIVID if that happened in my city because it means that I would be unable to get to work (my commute is 30 minutes by bus).

      Their desire for more money also caused a HUGE fare hike (10% is monstrous) that hurts poor people the most. I don’t know what $80,000-100,000 works out to in USD. But I can tell you that they are making more money driving buses than I am as a licensed banker, and that their desire for more money resulted in them getting it out of the pockets of people who make significantly less. I can tell you that small increases in transit fare can hurt bad if you are making low wages in an expensive city, but the 10% increase would be devastating to people who used the buses to get to jobs paying way less.

      It was greed, not necessity. I’m underpaid at my job, which is why I’m looking to get certifications so I can move to a different business line in the bank. I’m not going to lead a revolt and shut down all customers’ accounts or something while making six figures. The drivers should have been ashamed to participate in that. I’m surprised the city caved; I would have told them that they’ll be fired within one week and replaced if they don’t get back to work, no compromises.

      And that salary with the price of a basic house only $300,000!? That’s NOTHING! I wish my personal home/salary ratio was like that. I would have been collecting rent from a multi-unit property purchased with a 50% down payment quicker than you’d ever believe! Did these drivers think they were getting mansions or something?

      ARB–Angry Retail Banker

      1. I’m glad we have unions. In Canada they look beyond their membership. They are constantly pushing to drive up the minimum wage for all working people, and have recently been successful in their campaign to get the Canada Pension Plan (CCP) increased for all young workers. Some people will argue that these things are bad for businesses, but everything we invest in relies on ordinary people on ordinary wages spending money. If they (we) don’t have it, we can’t spend it.

        I consider these Canadian state benefits as very important in my FI plan. When my wife and I reach age 60, we will receive a combined CCP of $8,500 (in today’s money) a year for life, and it’s indexed. At age 65 we will receive an additional combined $10,300 a year for life. Another big benefit that unions would fight to keep if anyone was to try and take it away is our healthcare system; free (mostly) for the rest of our lives, so no big insurance premiums to worry about.

        We could get into lengthy debates on the above, which I won’t be doing, but I for one think we’ve got if friggin good in Canada.

  8. Yikes! A 7km run everyday? I often walk home from work to save money on bus fare, but I couldn’t imagine jogging that much each day! Of course, working in a suit and tie isn’t really conducive to jogging.

    I have another reason to dislike investing in Forex. Because you’re not investing and owning anything; you’re just buying glitches. When you buy shares of Coca-Cola, you own ingredients, bottling plants, supply chains, and brand equity that increase in intrinsic value as people buy more and more cans of Coke each year. With Forex, you are just changing one kind of money into another and hoping that the “glitches” in each currency’s values accidentally increase the value of the original type of money. To me, that’s like sitting around and hoping your bank encounters some sort of system error which ends up adding an extra zero to your account balance. Waiting for glitches to work in your favor instead of against you (as it normally does in finance and all other things) isn’t investing.

    After all that, I have nothing today about inflation.

    ARB–Angry Retail Banker

  9. I learned about your blog from the Canadian Financial Summit that just happened and I’m reading through all of your investment training track. So far so good, but this one raises a question. For your ‘Country Independence’ strategy, when you go to Mexico or SE Asia for a few months, don’t you still have the rent of your Toronto apartment to pay? I appreciate that food and drink would be less, but any accommodations expense in Mexico or SE Asia would be on top of your rent at home, wouldn’t it?

    Perhaps you have already answered this in another post I haven’t yet found, if so, a link to that post would be great.

    Thanks for your no-nonsense writing style.

  10. Hi, your inflation insight is real gem.
    Recently I came across an idea of what inflation impacts on our life of living.
    For example, South East Asian countries and a lot of emerging countries are high inflation, sometimes 5 to 10% (or more in extreme cases).

    Living in such a countries after retire, say, in Bali or Chiang Mai, living cost will quickly goes up.

    What do you think?

    In my opinion high inflation country’s currency will depreciate and get weaker in the almost same ratio of inflation in long run, so I’m guessing it’s no problem.

    Also what happens, do you think if you choose to live (or stay for long term for educating a kid, whatever) in Tokyo, not necessarily now but in the future, and at that time when you choose to live or till that time while living, Japan’s deflation keeps going? In contrast of Bali, the currency will be stronger?

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