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principles of finance a la shmoop the math of future value yeah it's all

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about inflation all right well most people don't realize

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that there's an almost guaranteed way to legally become a billionaire start off

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by saving ten million pennies or about a hundred grand invested in the stock [stock market building]

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market and then live another 100 ish years yeah if the market follows the [old man in bathtub full of money]

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pattern it's followed the previous century well you're almost certain to

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become a billionaire the only problem well at that point [money falling down]

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you'll be a too old to really enjoy the dough and be a carton of milk will by [skeleton under a tomb stone]

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then probably cost a million dollars so yeah the focus here is on the manner in

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which inflation eats into investment returns and how quality of life changes [100 dollar bill getting inflated]

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because of it all right here's you you're planning a

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life spouse homes picket fence 2.3 kids a dog put all your money into five

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percent yielding bonds which yield like three percent after-tax in a world where

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inflation is 2% and well it'll take you some 72 ish years to double your initial [writing on white board]

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year's investment painfully slow and most people think about investment [tomb stone]

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returns when they do think of them in an inflation blind way that is they were [man covers eyes with paper bill]

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just absolute return numbers so they didn't reflect the buying power of those [writing on white board]

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dollars down there in the future when you sold your stocks and then you know

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bought stuff in order to get ahead in the world where your money actually

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works for you rather than just being a placeholder store of wealth or savings [coin turning on table]

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well you have to beat inflation handily and there's a headwind that you face

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when you invest your money world conditions that is the world there's a [world map]

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highly indebted place country a owes a trill country B II owes 500 bill the

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u.s. owes some real 8 9 10 trillion and Counting depending on how you count it

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and most of that debt is payable in the country's own sovereign currency so that [european money falling]

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the countries are highly incentivized to let inflation run wild with lots of

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change in what a dollar buys ie that dollar buys less and less over time and

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then making it easier for the indebted to pay off their debt yeah well then

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inflation is the friend of the indebted nation the

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easy way to assuage the pain of carrying all that debt is to encourage active [boxing gloves punching inflation]

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inflation continuously over long periods of time so you know the kindly loving

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people here at shmoop are betting that long sustained inflation and well

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happens so let's focus on just the numbers behind that inflation well an [writing on white board]

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investment compounds it say 10 percent let's ignore taxes and fees for now but

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10 percent is about the historic norm over a century with dividends reinvested

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like you got seven and a half percent return on your stock two and a half

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percent dividend and yet we're ignoring taxes so that adds up to about 10

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percent a year alright so Wayback Machine time go back

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to the 70s post the Vietnam War wallah with the government spending loads on

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weapons tech and telecom prices are skyrocketing inflation is a 12% like it

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was for a few minutes in the early 70s well in this case in this scenario [president shaking Elvis' hand]

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you've actually lost 2% a year in buying power right your investments are growing

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at 10% and yeah we're ignoring taxes again again here we're ignoring them [writing on white board]

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yeah and with inflation at 12% well yeah you got 10 - well there you got negative

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2% buying power meaning the world's getting 2% more expensive to live in

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each year that's each year compounded and ouch at this rate in a decade you'll

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have lost a tire off your car or about a quarter of your value even though your [car falls apart]

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investment will have way more than doubled so this situation is an anomaly

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that kind of crazy inflation hasn't really happened in the US but in other

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countries Brazil Greece hi Russia we're looking at you well it has in the US the [world map]

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more common pattern has been that inflation regresses to its mean rate of [statue of liberty]

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about 2 or 3 percent a year and the 10% a year you're returning from index fund

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investments in the S&P 500 is a good solid net return outpacing inflation by

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7% or so to produce a real or adjusted return by.ya 7% that's your real return

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so a billionaire in 97 years is really what you Nair today well if inflation

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averages 3% a year for 97 years well then you have to take that future [writing on white board]

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billion dollars and discount it back massively like one bill

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and divided by the quantity one plus point zero three to the 97th power so

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what is a billion divided by about a seventeen point six or so well it's

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fifty seven million dollars today yep you read that right with three percent

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inflation for ninety seven years a billion bucks in ninety seven years will

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have the buying power or feel like fifty seven million dollars feels today that

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is you could afford a nice but not crazy showy home in Silicon Valley yeah that's [nice picture of a home]

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about fifteen twenty million bucks you can afford a nice cabin home in Jackson

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Hole yeah that's about six million and then you have to live on the rest so you

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can afford make a small jet but they're definitely not the g6 amazingly a

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billion dollars in ninety seven years at these rates is modest wealth not Google

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founder or drug lord wealth but you know nobody's gonna be crying for you either

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fifty-seven

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