Paying for future items in today’s dollars

the_future_is_now_850x265With interest rates rising in recent weeks I reviewed my portfolio and held a tongue in cheek exercise about inflation proofing it.  With rising rates comes more expensive borrowing costs which ultimately make items more expensive for the consumer.  Inflation will rise (I prefer a more realistic tool like the Chapwood Index over CPI), and we will get less purchasing power for our money.  When you factor in rumblings of Trump tariffs on imported goods that may counteract a strengthening dollar, things may get very expensive very quickly.

The genesis of this article started with a conversation my wife and I had about refinancing our home.  We were able to refi at 3.625% about 6 months ago bringing our mortgage to $1000 per month.  The house we live in would cost about $2500 per month if we were to rent it.  The trade off in interest payments versus cash flow at the time helped us make the decision to refinance.  We may pay the house off early one day in the future, but for now we will enjoy the lower payments.  

In the discussion with my wife I told her to think of having a $1000 mortgage payment in twenty or thirty years.  I followed up with a comment that our cell phone bill might be $1000 in 20 years!  The concept of paying for future items in today’s dollars started to make more sense to her.  Locking in a sub 4% loan for 30 years was a good decision for us at the time.  If my home appreciates at a similar pace to the interest rate I am paying on the loan I feel justified in extending the payback period as relatively risk free.

Another good example, although there was a recent stumble, was the Forever Stamp by the USPS.  If you recall, the purchase of a Forever Stamp allowed you to use that stamp for any domestic first class envelope forever with protection against any future rate hikes. When the forever stamp was put into service in 2007 the price of a first class stamp was 41 cents.  Rates rose every year peaking in 2015 at 49 cents.  This yielded about a 2.5% gain per year if you bought in 2007.

Then a funny thing happened at the USPS when they reduced rates to 47 cents in 2016.  If you bought forever stamps in 2015 you just lost 4% in a trade you probably felt pretty good about when you made it.  The last time the USPS dropped first class shipping rates was almost 100 years ago and it is likely an anomaly based upon prior experience in exponential government growth.

One last interesting story was based upon breakfast cereal.  I once had a conversation with a friend in which I joked that I was making 20% in a year in a new investment.  When he asked me about it I coyly replied that I wasn’t sure he had the stomach for it.  When I shared my secrets about my returns in breakfast cereal he fell out of his chair.  Wheat futures had risen from about $2 per bushel in 2001 to about $10 per bushel in 2008.  I was noticing similar pricing increases in the cereal aisle of my local supermarket.  Since cereal typically has a shelf life of about 6-8 months it was possible to load up and take advantage of locking in prices and watch my “investment” appreciate.  

The point of the story is that there are more ways to invest than the stock market.  No one is going to get rich buying Forever Stamps or hoarding cereal, but when you go through the mental exercise it may help you think about finances in a new light.  Consider alternative investments and ways to spend your money that can take advantage of buying durable goods in today’s prices with today’s dollars.  Many folks in the FIRE community are dead set against debt, but if you have discipline and caution, you can responsibly use debt to your advantage.  Consider this if any big ticket items are in your future.

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