inflation a concept i wish i understood much earlier

February 8th, 2008

Inflation: A Concept I Wish I Understood Much Earlier

I’ve been thinking a lot about financial education, both my own as a child and teenager, and what I hope to impart to my children. I think one of the biggest gaps in my early education was understanding the concept of inflation. Not that I needed a huge lesson in economics, but I know I didn’t understand that my money is basically worth less (can buy less) as time goes on.

To illustrate my complete non-understanding of the concept, I once saved my money in my sock drawer. Really. And I am not talking about a small amount of money. I started working when I was 14, first washing dishes in a restaurant where my mom was a waitress, and I worked my way up to short order cook and waitress by the time I was 15. I didn’t have a lot of expenses, and I am honestly a saver at heart, even though I seem to have lost sight of that somewhere in early adulthood. So the money I made, I saved. I wanted (at that time) to be a doctor, and so I wanted to buy a car when I could drive so I could work more hours that my parents couldn’t drive me to, and I also wanted to buy a car that would last through medical school. So I saved my money to buy a car.

In my sock drawer. Literally. I saved my money in my sock drawer. When I brought tips home or cashed my paycheck, I would count the money, fold it up in a sock, and stick it in the bottom of my sock drawer. I did this for two years. Two years. I am not sure what I had against banks, except that I thought my money was safer with me. Odd, I was. I knew it could earn interest in a bank, but somehow I didn’t think that it would amount to much (yes, I could do calculus yet I needed lessons in elementary math apparently as well). But I never considered that my money was actually losing a little value just sitting around, because of inflation.

Two years later, that money could buy a bit less than it could have at the beginning. That really is a concept I can understand, yet I didn’t at all. I needed to earn interest just to try and keep up with inflation and keep my money’s earning power the same. But instead, I hoarded in my sock drawer. Never mind the fact someone could have stolen it. But sock drawer it was, and $6000 later, I bought a car. My dad worked at the dealership, which is why I think they didn’t freak out at me bringing in $6000 in rolled up cash. But that’s another story.

How do you teach a kid about inflation? I’m not sure, but I am going to do my best to try. And my kids already both have bank accounts, although they haven’t started learning about them yet. I’m not an expert on understanding inflation, but I do understand that the same things keep costing more and more, and that’s the concept I wish I understood a lot earlier than I did.

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13 Responses to “Inflation: A Concept I Wish I Understood Much Earlier”

  1. Inflation isn’t going to make sense to younger kids (besides simply accepting it because the parents said so) but I think it’s pretty easy to understand for teens. By then, they’ve seen certain prices increase — like gas — and can make the connection between the inflation you occasionally mention and real consumer prices. I’m not entirely sure younger kids would need to understand inflation. 14 is a little old (sorry) but I find it entirely reasonable for primary school children to be saving their allowance in their desks.

    About buying a car with cash — if you talk to your father, I think you’d find that it’s more common than you think. It’s certainly not the norm, but there’s enough people out there that don’t trust banks (usually because of debt in the first place) that they’ll keep their own cash. They might give you weird looks on a NEW car lot for pulling your cash out of that sock you brought, but I suspect used care salesmen are both used to it happening and careful not to react negatively to anything a potential customer might do.

  2. You have to also take into consideration the value of your American money. If you were to convert it into Euro’s or British pounds, you will quickly realized how little the US dollar is worth. I million US bucks may be worth only $750K to $500K abroad. Or $1000 here is only worth $750 to $500 there. Inflation, deflation and stagnation all come into play. Since most of the items we buy are imported, you have to add that into the mix as well.

  3. I read a while back about a couple losing their life savings when someone heard they kept money in the sock drawer and stole it. $80k.

    I don’t remember how my parents taught me, but they did impress inflation on me somehow. I think it was because I watched old movies where $50 was a really big deal. And I knew that our grocery bill was around $100/week…this didn’t make sense.

  4. @Deamiter – I actually bought a new car. My dad is the inventory manager at a new car dealership. My parents financed the other $5000 of it for me (they didn’t pay for it, they just got the loan) and I paid the rest of it over the next two years.

    Oh, I wasn’t really talking about the “cash” part as much as the “rolled up money that used to be in socks” part. lol

    I started driving at the height of the gulf “war”, and gas was (for then) astronomically expensive. The price of gas in the first few months I sarted driving actually went down by about 50% and stayed down – in fact, only in the past 2 years did it get back to what i paid my first few weeks driving ($2 a gallonish). Maybe that is part of why I was so clueless. Heh.

    What i wouldn;t do for $2 a gallon gas now… heh.

    Boomie – I’m not sure my brain takes that into account even now, my brain is very sheltered. But that is an excellent point.

  5. This is an interesting point that you have made.

    Lots of people talk about the power of compounding, but there is really not too much on this opposite effect.

    I must add this to the lessons I am building up for my children.

    Thanks

  6. I have to agree that for younger children (I have 6 younger children) inflation is going to be a hard concept. Only a couple of them even know how to count their money. Only the oldest one understands that the bank is using his money to make more money & giving him a %. He might get it now, the rest, probably not.

    My kids all have piggy banks for spending money on their dressers, and a savings account in the bank for money they’re saving. They can see how much the bank pays them every month for keeping it there.

    I DO think it’s important to try teaching them before they get to high school and college so they don’t start out with a 50K salary someday thinking they have more buying power than they really do. Then they’ll be running a PF blog showing how they plan to get out of debt. ;)

  7. I think that you were probably fine saving money in your sock drawer when you were younger. A typical bank savings account rate of 0.3% isn’t going to do too much to fight inflation.

    We’re lucky to live in a stable country where inflation isn’t part of our day to day lives, but not everyone is. You could try telling a story about the hyperinflation in Bolivia (or other countries…). Employers usually had to pay their employees every day to make sure that their money was still worth something when they went shopping. Another popular anecdote about hyperinflation is when the money truck got robbed and the thieves only took the tires! (I’m not too sure if that one is true) There are also pictures from Germany’s hyperinflation of people bringing shopping carts full of money to the grocery store to afford their food.

  8. Awww… don’t feel bad! Think of it as your parents’ fault – and you’ll make sure to correct that for your kids!

    I think that in order to teach your children about inflation, you’re going to have to wait until they’re around 8 years old or so (how many years away?). Children can definitely only understand certain concepts beyond certain mental milestones; you could try every year to teach them and see how it turns out (maybe one of them is an early bloomer?).

    The most simple way I can think of explaining inflation to a child is thus: A baker who sells bread for $2 a loaf wants to make more money, so he starts selling it for $3. Chocolates cost $1 each, so now the baker can buy 3 pieces instead of 2! Life is great. But now, the chocolate-maker has to sell 3 pieces of chocolate in order to buy one loaf of bread! Before, he used to only have to sell 2 pieces. He thinks and thinks of what to do… and so he decides to raise the price of each chocolate to $1.50, and now, when he sells 2 pieces, he can still buy one loaf of bread. Now, even though the baker is selling his bread for $3, he still only gets 2 pieces of chocolate. That’s inflation: things cost more, but you get the same thing!

    You’re going to have a harder time explaining structural inflation, however.

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