Ridiculous Problems that Inflation Bring

If inflation went up yesterday, all of a sudden, increase the prices on every item that you sell out of your business or, or whatever you do, whether you're a consultant, you have, maybe you have a big business where you do you have hydrovac trucks, like whatever it is you do, you can't just send out a memo and an email to all of your clients that are paying you per hour on contracts that you've signed and say, oh, by the way, hey, because fuel went up and inflation went up and this and that, hey, we're going to increase our price by 20% for everybody. Sorry. Like, it doesn't work like that because you're going to irritate your customers and you'll lose customers. No more customers means your business shuts down and all the employees don't have a job to go to anymore. And so like the amount of people that you're responsible for, especially at a business owner level, that are impacted by that decision and the pressure, the pressure it puts on the shoulders often of a business owner is extremely high. And I think a lot of people who aren't in business don't really recognize that that's what happens. But even again, if you're just employed with somebody, so recognize that the business owner, whoever it is that you, you're working for, whatever that company is, they can't just make a command statement says, hey, because of inflation, we're going to go ahead and give everyone a dollar an hour raise right now because they have contracts that negotiate and all these things, like they don't have the new revenue coming in to support that decision. And all of their expenses are going up too. That would put them in a very, very tricky position to, to survive as a business unless, unless they were extremely well capitalized. And so that means they have cash on hand, money that's available to access. You know, I think back, and I don't know the stats on this today, a number of years back, at one point, Apple as a company was like the most capitalized business on the planet. They were just sitting on billions of dollars of money that they could, that they could put to work. Yeah. And, and so they need that sort of capital to make massive major decisions. They wanted to go do an R and D on a major project or whatever it is. They need to fork in a ton of capital and they might have to fork in, you know, let's say they want to create the next, you know, the next best, greatest phone or whatever it's going to be, and they're going to do something Radically different. Because they're kind of known for doing things radically different. And because they're going to make a game Chang, they got to invest a huge amount of capital, it might all fall apart. And so there's a possibility of a huge amount of loss. So they have to be well capitalized if it doesn't go well and they can't make these big massive billion dollar investment decisions on a, on a long term project that might take say three or four years of R D and development, you know, and planning and marketing and rollout and everything to be able to make this release of a new product. Unless they can make sure that they can also keep all their employees employed and keep the lights on and that kind of stuff. So recognize that the need of capital is important for everyone. Not just at the you and me level, at the, at the business level, federal government coffers level. Except they don't really have any capital because the only revenue source they have is us.

I just recently read how they deal with the need to raise prices in the stores. For example, retail business in Russia the inflation is higher than in Canada. So they need to raise prices from time to time just to keep up with inflation, with expenses, with gas prices and everything. So what they do, they actually, I've never seen this in Canada, but in Russia what they do, it's very interesting, they actually reduce the packs, they reduce the volume of the goods. So Instead of selling 10 eggs, they will sell nine eggs at the same price. Guess what? People don't really pay attention to that. They don't really think about it as inflation. Yeah, I mean it's a totally different packaging now, but they don't think about it, that inflation cost it. Or Instead of selling 1 kg of, let's say sugar, they sell 900 grams. Now guess what? That's inflation. That's basically taken out 10% of the value of the currency. Right. And this, this happened lots in the last, I would say five to 10 years. I haven't seen it in Canada. Maybe it exists. But what I noticed though, Richard, when you go to a dollar store, it is far more easier to make a purchase of something that is costing one dollar or one and a half dollars. But then when you make a calculation of the smaller packaging, you make a calculation that actually you're buying things for higher price than in a normal store. And also this is a great example of inflation where inflation drives the prices up, but instead of raising the prices in the store, they actually come up with different ideas on how to make different Packaging different, you know, volume, whatever it may be.

Yeah, you're 100 accurate. And I like your analogy of the dollar store because a dollar store used to be a dollar store and now a lot of things that you'll go and buy are two, three dollars, five dollars or whatever. And, and I, I, I, I seen, I seem to think that even though I feel like there was even a dollar store that changed its name, it used to be like the dollar store. Now it's the two dollar store. Like.

My, I seem to remember seeing like a, like a logo of one. Wait a second, that's different. That's not what it used to be. But another example of that is like you say, changing the packaging. So a lot of cardboard. So as an example, like cereal boxes and the kind of things now. So now a lot of that is, it's, it's thinner, it's, it's not as durable like that. Like the packaging has changed. And then, and then additionally like an area where I, I notice it more than anything else and I've, and I've seen it for, for a number of years and I'd be curious to see what other, what others were recognized as in, but bags of chips. All right, so you know, you go get a bag of chips now and, and you know, the, the kind of, the standard small one or whatever you used to get. Well, that it feels like there's a lot more air in there. You know, it's, it's, yeah, it's definitely not the same. Like you go and open it up and there's like seven chips where it used to be like, okay, well there's like, okay, there used to be like 50 chips in here or whatever. Like there's a huge difference. And how much is inside the package. The package looks the same on the outside because it's filled with air, but the quantity that you actually receive is different. And that's a, another huge area. You know, I think a lot of people would, you know, we would often maybe, I think in my past I would have thought, oh geez, you know, boy, that big company is trying to squeeze more profits out of us, you know, because they, they're putting less in there, so they must be making more money. And like, I'm really upset with them because I used to get this many chips and now I don't. And I think, you know, I know like, you know, 20 years ago, probably even 15 years ago, I would have really felt that way. My mindset has shifted and changed based on, you know, a lot of what What I've learned from Nelson and understanding more about how the consumer is the one that is always on the hook. The consumer pays for everything. And you think about all the hoops that a business has to jump through and the challenges that are presented to them in these areas like you know, delivery, supply chain, increasing cost of fuel, import taxes on goods like all these roll up of things that happen that all has to be front loaded to the end user who's buying the product. And so that's something that Nelson talked a lot about and you know, maybe in a little bit more roundabout way, but let's bring up this image that I was talking about. So this, what we're going to look at, this is a chart that Nelson used to have in his slide deck. And he was talking about one of his very first policy. There's several great videos and discussions on that. In fact we, you know, there's a great one, you can go to playlist on the Bankers Vault channel. It's a Nelson, you know, Nelson Nash playlist. And you can learn Nelson going through this exact example here and his commentary on it. But I'm going to give the Richard version of it anyway today here we see this example. This is Nelson's State Farm policy. And we're looking at the later history of that policy. Now this policy started in 1959. Okay. Nelson was 28 years young when he got this policy. And the original starting death benefit on this policy and I do my best to recall here, I believe it was a $20,000 death benefit. So don't quote me on that, but I believe that's what it was if my memories serve me correct. So his annual prem was 388.40 a year. Now when Nelson started this policy he was making about $10,000 a year and he again he indicated that that was a really good income at that time. He was slightly above maybe you know, the average kind of American at that stage. So 388 a year. That represents a large percentage of his total annual income. Like it's a good, it's a good amount. And he got that policy for death benefit and that whole purpose was, you know, to protect the family. He was married and that sort of thing. And those are really critical items to him. He really believed that that mattered a great deal and he always did throughout his whole lifespan. And when he got this policy it was actually his brother that sold him this policy. He used to be work, used to work at State Farm and didn't tell him anything that Nelson, you Know ended up putting in his book Become youe Own Banker and all the things that we talk about on all our content. But he ended up getting this policy and the thought was at some point in time the policy would pay for itself and he wouldn't have to put any more premium in. So he used the dividends that he received from the profits of the life company that he co owned to reduce the annual premium for the first 15 years. Okay, so in other words, he stunted the growth potential of the policy dramatically.

Yeah.

And he didn't know any better. Yeah, he didn't know any better because he just wasn't taught, it wasn't really conveyed to him that he could do more with the policy. Nelson also talks about, especially in his second book, Building your Warehouse of wealth, he talks about a couple of deals that he did through this policy with policy loans. One of his most profitable real estate deals he ever did came from a $3,000 policy loan he took from this policy where he got a piece of land, timberland, at a discounted price at about 25 cents on the dollar. So ended up being a smoking deal for him. And over his lifespan he was able to generate a great amount of revenue and even cash flow off of selling that land. He sold it, he financed a new buyer for 10 years of 15 interest. So he made a great amount of money on that deal. And what I really want people to understand is we have this red bar here with a premium. So 38840 if you just scan the bottom there again, you know, this was started in 1959. We're looking at a much later period of time that that red bar is perfectly flat and level. Over the entire time frame, the premium never went up. It was contractually locked in. But this is what's interesting.

I just wanted to add that the chart that we're looking at is actually not from the beginning from the policy. It's a 31st year of the policy.

And this is a stunted policy because he wasn't applying the dividends to paid up insurance like he would teach people to do because he didn't know any better at that time. And so what's interesting here with this example is there's a yellow line here. And that yellow line represents gcv, which stands for guaranteed cash value increase. So by age 100, the cash value must grow to equal the total death benefit. Now if his, his original contract was $20,000. So if the original death benefit was $20,000 by age 100 at the time of this policy Being issued, It was age 100. Now in the United States, it's age 121. The cash value had to grow to equal that that original death benefit number of $20,000. Now, as Nelson used that dividend to, he changed it and he had that dividend go buy paid up insurance. The policy started to grow and accumulate. He didn't have a flexible premium like a lot of people talking about paid up additions, premiums and riders and these sorts of things nowadays. He didn't have that in 1959. With this policy, all he had, all he was able to do was pay the base premium of 3,840. He couldn't make it any quote unquote better than that. Yeah. And what's interesting, and Nelson would say, you know, he. So he took checks out starting in 2006, all the way up to, I believe, 2010. So he took four checks out, he changed the dividend option and he had the insurance company send him a check. So he again stunted the growth of the policy by doing this. This is really important to understand. He chose voluntarily because he wanted to be able to take a picture of a physical check that he would say, look, stop taking my dividend and buying paid up insurance. Send me the dividend and send it in the mail. Now when he received that dividend, he took checks of them and that dividend didn't go back into the policy to make it bigger. So again, he stunted growth a second time in the policy. Here's the key thing. The guaranteed cash value increase, what we're looking here, this number is each and every year. So in 1990, he had whatever a chunk of guaranteed increase which was greater than the red line, his premium. And then, and then the next year he paid a premium and the guaranteed cash flow increase was again stacked on top. It's greater. And so every time that there was an increase every year that we're looking at, whatever the increase is, is being stacked on top of last year's increase. Okay, so as an example, in 1990 he paid $388.40 a year. And if we look at the yellow bar and the blue bar combined, we add those together, that gives us the green bar, the total. Well, that looks like, let's just ballpark it at $2,500. So the total increase in his policy was he put in 388.40 and he got $2,500 in cash accumulation. So he got his 388 back plus a lot more than that, basically. All right, now in as we go through this, you see each and every year, just imagine the green bar here is basically stacking on top of the one before it. What's really cool to see because, you know, there was no even. Like, when you see, like, 1998 to 2000 here, it shows it's going down, but it's not going down. The policy didn't retreat or go down in value. All that happened is the amount of dividend he got that year was slightly lower. So. But this, this green bar is actually added on top of the previous green bar. Okay, why are we bringing this up? Our conversation today is about inflation and the impact of inflation affecting Canadians. A lot of people in the globe right now. It's. It's a real problem. Nelson would tell a story about what things used to cost back in 1959, when he would buy things at the commissary, you know, at the army base where he was located, and his income being 10,000 a year. He would talk about the price of cars and all these things and the price of chicken, the price of banana. And then he would reference it to today and he would say he would. He would help people understand that actually from when he started to now, the price of chicken had gone down, the price of bananas had gone down, the price of cars had gone up. But what's changed was the. Was what you can get in a car, what type of bells and whistles and things, and how long that. How many miles that car would last. You know, when you were buying cars in 1959, that you might not get 10. You might not get 10,000 miles out of them. You know, maybe 30,000 miles. Now you can run a vehicle 300,000 miles. So there's a huge difference in the function of that item in that environment. He would say, you're actually getting more of what you pay for. Even though the price of a car has gone up, what you get for it has kept pace with that timing analogy, basically. And then he would talk about a couple of core areas where inflation has skyrocketed or the value quote, unquote, value of the dollar skyrocketed. It was. It was in. In health, so like medical costs and expenses, and a lot of that has to do with, you know, won't get into it, but like the. The insurance problems and mostly was focused on the United States. But then he would also talk about education, so like university college education. And there was one other area he mentioned. I don't remember what is offhand, but there were three primary areas where, where the, where the cost of things were so dramatically higher and different than the regular basket of goods that we purchase. Here's one of the key things I want people watching this to see. That premium of 388.40 that Nelson did, and he locked it in. It never went up. He locked it in in 1959. Well, if we think about the value of the dollar, the US Dollar in this case and the Canadian dollar would be not dramatically different, I don't think at that stage of the game. The value of the dollar at that point, Nelson locked in the value of that dollar because he locked in the 388 premium. So he, he locked in the strongest dollar available to him and he was paying that premium now in weaker dollars to the rest of his lifespan. So as his income went up, he would make the same injection of 38840. But he was, you know, even though the value of the dollar was going down, the premium didn't change, but the increase in the policy was keeping perfect pace with inflation over his lifespan. And you know, he said that, you know, the, the dividend alone that he received, you know, in like 2006, you know, 2007 and stuff, it was, it was more than 10 times the premium that he was put in that same year. And so just take a moment and think about that. Put yourself down the road into the future. Recognize that you could lock in the strongest dollar today and you could be making a premium deposit into a contract that you own and control that by the virtue of its design and by historical nature. We can use Nelson's history, 88 years on Planet Earth, as a reference point. And all the cycles and booms and busts that he experienced over his lifespan, every time that the markets crashed, for whatever reason, his insurance value still went up. And so the reference point of how that policy, that one that was, I wouldn't say poor to design. It was designed to do what it could do at the time, but he stunted the growth. So in the first 15 years and then he stunted it again later in the policy just to prove a point, because that's the kind of guy he was. And when Nelson passed away, and again, I'm doing this from memory, I believe the final death benefit that paid out in that policy was somewhere around $135,000 and $140,000. It started as a $20,000 death benefit. Well, 20 times 5 is 100, you know, so it was like 6 times, 7 times greater than the original death benefit. And at the point in time, where Nelson passed, the cash value would have been much closer to that death benefit line because the cash had to grow to equal the death benefit. So it kept pace with all the problematic issues of inflation over Nelson's lifespan. Now, does that mean we can say with absolute certainty that's going to happen for every policy owner on planet Earth? The answer is no. But we can, we can utilize a little bit of logic, some history and some personal experience of people that have come before us. And I haven't been around for 88 years. You know, my experience, I don't have the lifespan behind me to show that, but I have Nelson's lifespan that I can, I can leverage what he instilled in us as knowledge. But also these other impacts of things like, you know, this one policy and the other policies that he would tell us about.

Yeah, exactly. So, and then we can learn from Nelson and see how we can do the same. And maybe we have like I have a, a little bit lower lifespan left till I turned 100 years old, but still if I do this, then I can capitalize my policy so that it over grows faster than inflation. One thing I wanted to add, Richard, is that when I look at the chart, I'm thinking, was it easier for Nelson to pay 388 per month in 1990 or later than it was in 1959? What do you think?

Oh, yeah, yeah. And it was 388 per year. And yes, absolutely, it was easier for him to pay it in 1990 than it was at the beginning because his income had gone up dramatically and because.

The cost of dollar was also lower back then. Right. And 30, 31 years later after the policy got started, it was much easier for him to keep paying this premium. So what I'm trying to say is sometimes I get this, this question asked, hey, Roman, how serious soon can I stop making premium payments? If it is easier every year for you to make this premium payment, why would you ever stop? For me, the objective is to pay for as long as I possibly can. And I know for sure that the premiums will be much more affordable to me every single year as I age and as my income potentially goes up. Even if I'm retired, when I go to passive income time, I still will have some, something coming in as maybe, you know, government security, something else. Maybe I will still have some income coming in. I will want to pay at least the minimum on my policies or maybe even the maximum if I can just to keep that momentum going up because the premium for me is easier to make than it was initially.

Perfect thing that you said there, Roman, because again, let's just take the chart we looked at in Nelson's example and walk that one step further. So if we're at a stage now where you're in passive income mode, you know, maybe you're getting CPP and OAS and you've got, you're taking, you're pulling money down out of what, a pension or maybe you have registered accounts, passive income from real estate rentals, whatever it is that you have going on in your, in your bag of income goodies, okay? Commit some of that capital towards continuing to fund at minimum, the base premium of policies that you set up. If you embrace this concept and you, you're following the teaching and things that we're, we're doing and you're following what Nelson walks you through in his, you will have a very efficient machine working for you where every time you inject that base premium, just like in Nelson's example, Now you're getting 3, 4, 6, 7, 10 times the accumulation in account value in cash value in the policy, which is happening because the insurance company is on a contractual obligation to grow the cash value weekly death benefit. So as you age, quite literally, the policy gets more efficient. It's engineered to get more efficient from a perspective of cash accumulating to chase the death benefit. There's no other option. There's nothing else that can be done. It must happen because it's a contractual requirement of the insurance company. And so I personally am going to want to pay those premiums. Now, I think when people ask that question and it's okay, it's an okay question to ask, that's saying that you're in the discovery process, you're still just learning. There's nothing wrong with that question. No question. There's nothing wrong with any question. But recognize how we're thinking. I think what people just want to know because they're so accustomed to getting beat up by different costs and expenses that they want to know they have the option, the ability to, or the choice that they might be able to stop making the prep payment. And so, you know, for, for far and wide, in most situations that will be the case. It just depends on size of your program when you get started and, you know, a number of factors. But the key thing is instead of asking the question, so just change your mindset. Instead of asking the question, when can I stop paying? Start asking the question, how much can I put into it? The older I get, how much can I put in? And if you just adjust that question in your head, it doesn't mean that you might. You won't have the choice to stop. What it means is that your focus and your energy and your attention is going towards accumulation, towards increasing your value proposition and what you do from now to the day that you might want to stop, because you're really, when you get there, if you have that question in mind, you're not going to want to stop. And the amount of legacy potential and the amount of accumulated cash values and things that happen will be far greater than someone who has the mindset of when can I stop? If all you're thinking about is when you can stop, you're missing a huge component of the thinking process to what's going to make you ultimately successful with this journey. And Nelson says it on page 85, point number two in the book. If you knew you were going to give back every single dollar you put into a system potentially tax free, would you ever object to putting any more money into it? It's a rhetorical question. Obviously, the answer is no. But if you really fundamentally understand that one point in Nelson's book, your brain starts to, just like your brain's a powerful tool, it's just going to start shifting and it's going to start taking you down the path that's going to provide what I believe the most successful outcomes for you. And financially speaking, when it comes to this process, that would be injections of premiums. You know, our friend James, another with the Banking with Life channel, he says that the premium solves the problem, Right? And, you know, the, the problem is the problem and the premium is the solution to the problem. So I think that that's when we understand that it's a really good way of looking at everything.

Thank you so much for watching. We know that you've enjoyed this conversation so far. To watch the rest of this conversation, go to the wealthwind Bastiat Channel now and you can watch the first part of it. Thank you so much.