[quote=CA renter]Okay, let’s say we have 100% inflation over 10 years, and your income goes up only 50%. What if your healthcare costs go up 150% (they’ve been outpacing inflation for quite a while), food costs go up 90%, and energy costs go up 100%.
Let’s take a hypothetical wage earner who earns $6,000/month (make it net, just to keep it simple).
1. P&I is $2,000/month on a 30 yr FRM.
2. Healthcare costs are $1,000 for a family of four.
3. Gasoline, natural gas, electricity run around $600/month.
4. Groceries and household items cost around $1,000/month.
We’ll leave out the other costs just to keep it simple, as well; most of those will go up, too.
These costs add up to $4,600/month while your earnings are $6,000. These costs consume 76% of your earnings.
….
At the end of 10 years, the wage earner makes $9,000/month (unlikely, will go into this later).
1. P&I are $2,000/month.
2. Healthcare costs are $2,500/mo.
3. Energy costs are $1,200/mo.
4. Groceries and HH items are $1,900/mo.
These four items now cost $7,600.00 while your wages are $9,000/month. They consume 84% of your earnings.[/quote]
OK, lets use this example and your numbers. Today, this couple’s expense would take up 76% of your income and by your numbers, lets say with 150% health care inflation while wage is rising at 50%, which is absurdly off balance and I don’t think is sustainable, their % of income going to expense only went up by 8%. That show you how much of a boon it is to have a fixed rate mortgage. Imagine what those numbers would be if income rises at 2/3 of the rate of assets inflation, or even 3/4? We’re not even talking about income rising at the rate of CPI. I see a few things this couple can do to drastically change their financial numbers.
1) Energy cost. I say, if it goes up 100% over 10 years, it would make perfect sense to go solar and live close to work and get a bike. They would probably cut down the energy usage drastically from the $600/month they’re spending. BTW, $600 is kinda high. My cars are definitely not the fuel efficient type and I leave my AC on at 73 all day long. Yet, my total energy usage is around $500 during peak summer months and around $350 during the cooler months. Even with my usage numbers, it already make sense to go solar.
2) Food, again, this is kinda high. Maybe because I don’t eat out nearly as much as most people. But my food only takes up <$500/month for a family of 4. We buy organics when we can, so this is not skimping on quality at all. If your estimating $1k/month because you go out to eat a lot. Then maybe starting to cook fresh meals will not only reduce your food cost but make you more healthy as well.
3) The main key point, do you seriously think we'll have health care and other cost rising at 100-150% while income rising only at 50%? I call that a bubble. We all know what happens to bubble. I don't see those kind of inflation out pacing income as sustainable.
Here are some data to back up point about assets inflation vs CPI.
Food inflation: http://www.forecast-chart.com/inflation-food-price.html (2.7% over the last 20 years)
Energy: http://www.forecast-chart.com/inflation-usa-energy.html (5.1% over the last 20 years)
Medical care: http://www.forecast-chart.com/inflation-medical-care-cost.html (4.1% over the last 20 years)
So, food price basically track CPI numbers. Medical care is rising faster than inflation, but only by about 30-50%, not 300%. How much of this is attributed to true inflation and how much of this is attributed to better medicine/tests/etc. that keep people alive a lot longer. Also, how much of it is attributed to people just getting fatter everyday and needing more healthcare.
I concede that Energy have been rising almost 2x the cost of CPI. However, I don't see that happening much longer. If it continue in this trajectory, it would be a no brainer to go w/ solar and electric cars. Your average renter won't be able to take advantage of alternative energy, but as a home owner, you can totally do that.
