Grandpa's Wisdom: Taming the Inflation Monster

Grandpa retired at the age of 40. Couple of decades ago, that is. 

He planned his finances well. He understands money.

He loves teaching his grandson.


Here is a conversation between Grandpa and his Grandson about inflation.


Grandson: Grandpa, what is inflation? I heard Mom and Dad talking about it.


Grandpa: Inflation is something that affects the prices of things we buy - it makes prices go up over time. This happens for products you can hold, like toys, food, or clothes, but also for services that people provide.

Grandson: Services? What are those?

Grandpa: Services are things people do for you, instead of products you can hold. For example, when we go to a restaurant, the food is a product, but the waiter or waitress serving us is providing a service.

Grandson: Oh I see! Like when we get our hair cut, the haircut itself is the service.

Grandpa: Exactly right. Now inflation doesn't just make product prices go up, it also causes prices for services to increase over time too.

Grandson: Can you give me an example for products first?

Grandpa: Sure, let's think back to when we went to the ice cream shop last summer and you got a double scoop cone for $3. Now, because of inflation, that same cone might cost $3.50 this summer.

Grandson: But why do the prices of products go up?

Grandpa: There are a couple main reasons. One is when there is high demand for a product and not enough supply. If there's a really popular new toy that everyone wants but the stores don't have enough, the sellers can charge higher prices.

Grandson: Oh, I understand! It's like whenI really wanted that new video game - they were sold out so the stores raised the price.

Grandpa: Exactly. That is called demand - pull inflation.
The other reason product prices rise is if the costs for companies to make the product go up. Like if they have to pay more for materials or pay their workers higher wages, they'll increase prices so they can still make a profit.
This is called cost-push inflation.

Grandson: Got it. So products get more expensive due to inflation from high demand or higher costs to make them. What about services?

Grandpa: For services, it's usually because the cost of providing that service increased. Like when we hired someone to mow our lawn last summer for $25. This year, they may charge $27 or $28 because their own expenses went up.

Grandson: Why would their expenses be higher?

Grandpa: It could be that they have to pay their workers more, or the gas for their lawn mowers costs more than before. So they need to raise prices for their lawn mowing service to account for that.

Grandson: I see! So inflation makes prices rise for both goods and services, but for slightly different reasons.

Grandpa: Also remember this. Inflation also erodes the value of savings and makes it harder for people to afford things like homes and cars. Especially for retired people like me.

Grandson: Grandpa, you've helped me understand inflation so well now. But how does it really affect people?

Grandpa: Inflation can have some tough impacts, especially for retirees living on fixed incomes like pensions or savings. Let me tell you about my friend Ralph. He retired at 55 with what he thought was enough money saved up. But over 10 years, high inflation really ate away at the value of his savings.

Grandson: Oh no, what did he have to do?

Grandpa: Unfortunately, Ralph had to go back to work part-time just to make ends meet because his retirement money wasn't stretching as far anymore due to rising prices.

Grandson: That's terrible! I don't want inflation to ruin your retirement too, Grandpa.

Grandpa: You're very kind to worry about me. But you know, I actually have a strategy to help protect my savings from inflation's effects. Would you like to hear about it?

Grandson: Yes yes, please share your wisdom Grandpa!


Grandpa: Well, when I was still working, I invested a portion of my money in things that tend to go up in value during periods of high inflation. Like an S&P 500 index fund that tracks the stock market, sovereign bonds from stable governments, and a bit in real estate too.

Grandson: What's the stock market? And what are sovereign bonds?

Grandpa: Good. You are very curious. Its a large topic though. Why don't we park those questions for another day? Let me first finish explaining how those investments help me beat inflation.

Grandson:  OK Grandpa.

Grandpa; As costs and prices rise from inflation, the value of those assets like real estate or stocks also increases. So while inflation decreases the value of cash savings over time, those investments act as a hedge by going up too. It helps me retain my purchasing power.

Grandson: Wow, you really planned ahead! That's such a smart way to protect your retirement from inflation.

Grandpa: Let me first finish explaining how those investments help me beat inflation.

As costs and prices rise from inflation, the value of those assets like stocks and bonds also increases. So while inflation decreases the value of cash savings over time, those investments act as a hedge by going up too. It helps me retain my purchasing power.

For example, when I invested $100 in the S&P 500 at the beginning of 1995, by the end of 2024 that investment  has grown to $1,920.11, or 10.63% per year. Let's say twenty times approximately.


During the same period, products and services I could buy for $100 in 1995, now cost over $300. Just three times. Slightly less actually.

I invested atleast a tenth of my salary regularly every month.

 Sometimes even fifteen  to twenty percent of my earnings.


I never had debt. Living within means is an age old wisdom in our family.

If you do not have money to buy something you want, you wait till you accumulate it.

 You never take loan to buy stuff or to go on vacations.

 Never. 

That's our family's commitment. That is what my father and grandfather taught me.

When you take a loan,  you are beholden to that debt till you repay.

We value our freedom much more than material enjoyment with the money that we have not yet earned.

Now you see how my investments have beaten inflation?

Grandson: Wow, you really planned ahead! That's such a smart way to protect your retirement from inflation.

Grandpa: It's taken years of patience and wise investing. I also make sure to only withdraw about 2% of my net worth each year for expenses. That way my nest egg isn't depleted too quickly by inflation.

Grandson: I'm so relieved you've got it figured out Grandpa.

You deserve a relaxing retirement after all your hard work! 

Thanks for teaching me about inflation, Grandpa.

Grandpa: You're very welcome, my boy. Don't hesitate to ask me more about stocks, bonds and investing when you're ready to learn. For now, hope you understood the key concept of how inflation works.

Be prepared to make smart money choices when you're older too.

I sincerely hope that you will live debt free all your life.

Grandson: I think so Grandpa. I would not want to enjoy products or services with the money I have not earned yet.

Thanks for explaining it so clearly, Grandpa!



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