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Why You’re Not Getting Ahead Financially and What to Do About It

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If you feel like you’re running on a treadmill working and getting nowhere financially, you’re not alone. Most people live paycheck to paycheck, earning just enough to get by.

What a lot of people don’t realize is that the cost of living has gone up exponentially over time while wages have remained flat. Some have begun to notice this recently, as gas and food prices have increased dramatically the last couple years. People are slowly waking up to the effects of inflation, as the CPI has been at the highest levels in 13 years.

Why It Feels Like You’re Getting Nowhere Financially

We hear all the time that inflation is supposedly only 2-3% a year. And yet, many Americans feel more and more squeezed financially. It’s harder to purchase a home, college tuition prices have risen exponentially, and now even food and gas is more expensive. Why is this?

1. CPI Understates the True Cost of Living Increase

Most fed announcements and policy decisions revolve around what’s known as “core CPI” which is the CPI excluding gas and food prices. This is supposedly because those two items are volatile and can have a large effect on the CPI figure.

Gas and food just happen to be two of the most common living expenses. Everyone that does their own shopping can tell when gas and food prices are higher. But for some reason they aren’t counted in the consumer price index that is a benchmark for inflation.

That’s just the tip of the iceberg, though. Since 1980, the way CPI has been calculated has materially changed many times. For instance, the CPI no longer factors in the cost of home ownership (ie. the price you pay to buy a house), but rather estimates the cost to rent that house.

Looking at data from the US Census Bureau, the average home price from 1963 to 2020 rose over 1,900%, from $19,300 to $391,000. However, according to the government’s inflation calculator, $19,300 in 1963 has only the same buying power as about $165,000 in 2020. That’s almost 2.5x less than the $391,000 average home price.

Since CPI was modified to exclude the price of homes, you can see why the reported inflation figures are actually vastly lower than they would be otherwise. Most of us would assume a benchmark measuring the cost of living would account for this, but that’s where we’re mistaken.

The CPI is not a cost of living index; it’s an index that measures the change in price of an arbitrary basket of goods, in which the basket itself constantly changes. In fact, the BLS itself even states as much.

“Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing, that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this role to also take into account changes in other governmental or environmental factors that affect consumers’ well-being.

The takeaway here is that the CPI does not represent a true cost of living increase benchmark. It’s designed in a way to keep inflation numbers relatively low, and is done so in an opaque way.

The chart below compares the stated CPI figures in red with a “true” inflation in blue, based on the 1980 methodology of calculating CPI. As you can see, the actual inflation numbers are substantially higher than reported.

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Why is a Lower CPI Beneficial to the Government?

There are several reasons why it’s beneficial to report low CPI numbers. For one, it prevents the middle class from panicking. When you hear inflation’s only 2-3% a year, no big deal. But if you heard it was 10% or higher some years, that’s actually cause for concern. You might actually stop and think, which is the last thing politicians want you to do.

Many policy decisions are also based around the reported CPI. A low figure means programs like Social Security or Treasury Inflation-Protected Securities (TIPS) don’t have to be adjusted upwards as much. This allows the government to keep a lid on expenditures to help reduce their bloated budgets.

Low inflation figures are also helpful in presenting the illusion of a healthy economy. It keeps investors happy, as their perceived rate of returns are higher. And of course a healthy economy is a great thing to boast about in future election cycles.

2. The Cost of Necessary Goods Has Substantially Increased

The chart below from Mark Perry at the American Enterprise Institute has been dubbed the “chart of the century.” It paints a stark picture of just how much prices of certain consumer goods have diverged over the years.

Red lines are goods that have become more expensive, while blue lines are those that have become more affordable. We can see that the red lines depict necessary goods that are critical in nature, such as hospital and medical care, college education, housing, and food. The blue lines are more luxury goods and nice-to-haves, such as new cars, electronics, and toys.

You can debate many implications from this, such as the effect of government intervention on the price of goods compared to free market forces on the price of goods. We can get into that some other time. What’s clear is that necessities are more expensive today, which is why many feel like they can never get ahead financially. One medical setback or college loan can have you treading water for years to pay off the debt.

3. Wages Have Not Kept Pace With Inflation

The chart below shows that while wages look higher now, purchasing power has remained stagnant the last 60 years. Note, by the way, that this is adjusted according to CPI inflation. We now know the true inflation rate is substantially higher, which means that purchasing power has actually decreased over time.

At the same time, worker productivity has been steadily increasing and is now at all-time highs. The disparity between output and compensation has never been wider. Unfortunately for individuals, that delta is being captured by the corporations they work for.

U.S. Economy: Wage Stagnation Is One Disease With Many Causes - Bloomberg

What all of these charts conclude is that the true cost of living, especially necessities, has increased, while purchasing power has remained flat. This is why many struggle to keep up financially.

The Path to Getting Ahead Financially If You’re Behind

If you want to get ahead financially, it comes down to increasing your net worth at a faster rate than the rising costs of living. You have to beat the true inflation rate, not the reported CPI figure.

This essentially boils down to two things: increasing your income faster and owning the right assets.

Increase Your Income

When it comes to increasing your income, most people would be best served getting a higher paying job. How do you do this?

You want to work at a growing company in a booming industry (ie. most tech companies) and ideally have a performance incentive (ie. equity, bonus, commissions). The labor market is a game of supply and demand. Find companies with a shortage of labor with skills that you have, and aggressively hustle to land those opportunities.

Tech company packages are outrageous these days, and you can land 6-figure jobs without necessarily having to be a software engineer. If you’re working in finance, accounting, legal, compliance, operations, or any other role at a non-tech company and want to increase your income fast, your best option is to join a tech company doing the same thing.

I guarantee you will find hundreds of roles just like yours but pay much, much more. Many people couldn’t relocate to a tech hub like SF or NYC before, but these days remote work is much more accepted so don’t use location as an excuse.

If you currently work in a low-skilled role, your best option then is to learn new skills that are in high demand. Figure out where your strengths lie and pick skills that align with them. If artistic, learn web design, mobile design, UI/UX. If good with numbers, look into the accounting/finance route. If you have strong communication skills, sales is probably the best bet and a very lucrative one at that with B2B sales.

You don’t have to take on massive student loans to do this, either. There are plenty of online learning options available these days that are cheap or free. Learn new skills, find a new role using those skills, and slowly make your way up after you have experience.

After you’ve maximized your job income, you can then focus on things like side hustles to generate some additional income. But the time it takes to scale a side business or freelance gig up would be much better served on things like switching companies, getting a promotion, negotiating your salary, or learning additional skills first.

Invest in the Right Assets

Earning a high income is great, but if you want to truly get ahead financially and perhaps one day achieve financial independence, you can’t rely on a job income forever. You need to make your money work for you.

This is where owning assets comes in. The true path to wealth lies in converting your income into assets that appreciate faster than the true inflation rate. Every time the government prints money, it devalues the purchasing power of that currency. Keeping your savings in fiat dollars means you’re actually losing money every year, as its purchasing power gets eroded.

The money the government prints eventually makes its way into assets. The currency gets devalued while asset prices go up. This is why the rich keep getting richer.

However, not all assets are equal. It’s pointless to own bonds that have no appreciation and near zero percent interest rates if you’re trying to grow your wealth. Naval’s tweet below sums up the importance of owning the right assets.

So what are the “right” assets to own as of 2021? The short answer is tech stocks and crypto.

Global macroeconomist Raoul Pal presented a unique way of looking at asset performance by comparing asset prices to the Fed balance sheet. His findings were that tech stocks and crypto are the only two that outperform.

Of course, we all know that past performance isn’t necessarily indicative of future performance, as every financial disclosure reminds us.

However, it is an indication of where money is being allocated towards. There is often a reason why outperformers are outperforming. Technology has and will continue to disrupt and innovate until the end of time. Crypto represents one of the biggest technological innovations to take place in our generation. Investing in both is allocating money towards the future, with massive secular trends behind your back.

Yes, there will be volatility involved. Nothing in life is free, and when it comes to investing the price to pay for higher returns can sometimes be higher volatility. As a long-term investor who’s looking to dollar cost average in to assets, though, you shouldn’t worry about short-term price fluctuations.

All you hear about in the mainstream news is how volatile Bitcoin’s price is, but over the last 10 years it’s grown at a compound annual growth rate of 213%. Ethereum’s is even higher. At its core, Bitcoin and other cryptos are simply growing as a function of usage, just like every other technology.

Conclusion

If you’re wondering why it’s so difficult to get ahead financially, why it seems like you toil away at a job for years and somehow never have enough saved, this article explains why. The cost of living has significantly increased over the years while wages have essentially remained flat.

Inflation is a silent tax that erodes your purchasing power over time. The only way to keep up or outpace it is by maximizing our income and reinvesting it into the right assets. Technology stocks and crypto offer us an opportunity to participate in the transition into the digital age and its wealth creation. It’s up to us to open our eyes and adapt accordingly.

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