inflation

[BMan]

after looking at inflation for a while today i just had a few questions

obviously forgetting all other costs as were looking at just inflation

in simple terms
lets say the inflation rate was 2.5%

if you had 100k sitting in the bank, lets say doing nothing to make it easier
basically inflation would mean even though its still 100k its really only worth $97,500 as everything else has gone up?
net gain = -$2500

if you put 100k into a term deposit @4%
paid the tax at 34% you would have $102,640
less inflation =$100,074
net gain = $74

if you purchased something for 200k and put 100k as deposit you now have 100k debt
does that mean its even though its 100k its really only worth $97500
so a net gain = $2500?

if you waited a year to purchase something for 100k it would now be worth $102,500?

is this how it works?

so in theory inflation actually eats your debt away?

 

[bashworth]

if you purchased something for 200k and put 100k as deposit you now have 100k debt
does that mean its even though its 100k its really only worth $97500
so a net gain = $2500?

But you would be paying interest on the debt at say 6% so after a year your debt would be $106,000. With a reduction for inflation in today value the debt would be $106,000 less $2,600
net loss = $3,400

 

[Ausprop]

But you would be paying interest on the debt at say 6% so after a year your debt would be $106,000. With a reduction for inflation in today value the debt would be $106,000 less $2,600
net loss = $3,400

add back rent.

inflation is the friend of property investors and often the biggest component of the return

 

[joeExpat]

after looking at inflation for a while today i just had a few questions

obviously forgetting all other costs as were looking at just inflation

in simple terms
lets say the inflation rate was 2.5%

if you had 100k sitting in the bank, lets say doing nothing to make it easier
basically inflation would mean even though its still 100k its really only worth $97,500

No, $97,561 for 2.5% Inflation

 

[BMan]

how is it 97,561?

 

[speary]

$100,000 / 1.025 = $97,561

 

[Singo]

Yes, inflation eats the debt away.

Say you own 1M property with 800k debt and say by inflation only it doubles in value in 25 years, you will have 2M property with 800k debt. In today's value, it is 1M property with 400k debt. And because of inflation, rents would have gone up as well, so you could have paid capital as well thus less than 400k debt.

If a 30 year old couple have 10 such properties, inflation will create them 4M in that many years. 5% return means 200,000 per annum. Who need superannuation when you have inflation?

 

[Paul@PFI]

Present value v's discounted cash flows (future value).

"A dollar today is always worth more than a future dollar".

I hate financial maths. My financial calculator saves my bart daily.

 

[BMan]

i was doing $100,000 - 2.5% = 97,500


ok thanks guys. think i actually understand it now

i like this saying too "A dollar today is always worth more than a future dollar".

 

[Paul@PFI]

Who need superannuation when you have inflation?

Inflation makes living costs higher..It doesnt care if you have an age pension & no assets or a $2m super balance. Inflation affects your total spend.
Inflation raises wealth values (we hope property values rise!)
Inflation doesnt affect debt. It remains at present values.

Super is a secondary form of wealth savings which benefits people AFTER retirement. When combined with non-super wealth it provides self funded retirees with security against inflationary impacts on prices.

Total wealth maximisation is the key issue. Super can deliver tax savings which deliver compound growth savings. Super may be a tad more efficient when compared to paying the top marginal rate. Inflation will cost no matter what.