Although personally I do not really like Robert (try to sit on one of his seminar, not only he is swearing a lot, but he is rude to practically anyone publicly), but it does not mean that what he preaches is not good. On the contrary, many and many of his teaching is pure gold and something really need to be adopted by every one. This is one of them….

Inflation is your enemy

Invest or become a loser

Most people will associate inflation with price increase, but that’s not really accurate – price increase is the effect of inflation, not the cause. The real cause is because there are more money in the market. If there are more money and resources is scarce then people will be willing to offer more money to secure the resource for himself. Because of this the price of that resource become higher. Read this article for better illustration.

But what makes more money exists in the market ? Government is printing it rather out of control. Before US President Nixon abolish the ‘gold standard’ on 1971, every $100 printed need to be guaranteed by about 3 ounces of gold (1 ounce is $35). So, since gold is precious metal that cannot be just made from thin air, this kind of controlling the value of money.

But since then, all moeny if the world is now without gold backing. It’s called “Fiat money” meaning the money only become valuable because the government make it so/force it by law – otherwise it will just worthless paper. But with gold backing, you can be sure that if you have $1000 you can go to the government to swap it with around 30 ounces of gold.

Why all government doesn’t want to use gold standard? Because it make it difficult to them. For example: just bailout of Citigroup on 2008 costed $300 billion. That required 9 billion ounces of gold or 900 million kilogram of gold. Not easy , right ? But that occasion, the treasury just sign a check and $300 billion “money” created from  thin air.

It’s only a matter of time that US Dollar in particular will lost most of its value because of their excessive debt. All other country have similar diseases but not as severe as US.

Invest Money

Invest Your Money

So, if you have some money, it’s not really good to just save it. You have to invest it. Buy property, stock or better just buy gold or silver. But it doesn’t mean at all that you just spend your money without control. You need to come to the level of investor. In order to do that you need to first save your hard earn money first, have some emergency monry to survice at least 6 months, then invest the rest of the money. You need also to be comfortable with debt, because debt leverage your money and make you achieve your goal much faster.

Some number for illustration: if 20 years ago, you have $50,000  and inflation is at 5% per year, then:

• If you buy small house in outside Melbourne, it is now worth $200k
• If you just invest in IBM stock (was $30, now $120), it is now worth around $200k
• If you invest in S&P500 index (was 300 pts, now 1000) it will worth more than $150k
• If you buy gold (was $400/oz, now $1000/oz) now it is $125k
• With 3% interest, your bank account will be around $90k
• Save under your pillow or in your drawer, it will still be $50k

Of course, this is hindsight. But we need to treat hindsight as possibility -or- statistically probable (as it has happen), right?

Have a quick look if you have debt? With inflation the debt become les and less in value, in other word your debt is actually decreasing in value. That’s one of the reason why having debt is a must for the rich…

What To Do

If you really want to back in charge on your own financial affair, the level of hurdle that you need to overcome is roughly like this:

1. You start earn some money: the more you earn the more the bill is
2. Budgeting comes to play: make sure whatever your expenses MUST BE less than whatever you earn. You start create a saving .
3. Your saving is growing and start to pile up more money in your bank account.
4. Once you have enough for emergency and the amount is quite substantial START INVESTING.

This is the essence of what Robert Kiyosaki said, don’t be a losers just by sitting around doing nothing with your money. Learn how to invest – it’s your money anyway and be a winner. The investment vehicle itself is totally up to you.

If you want fast and high return with unique capital protection capability then sharemarket investment probably suitable for you. If you like more calm investment and longer term, then property investing is your choice. Or if you want real action of business, then invest in a business and start make money. The key here is choose the one that you know, do not rely to someone else.

And of course while you are doing your investing, don’t forget also to protect yourself with insurance.

Conclusion

“Savers are Losers” is a true statement. You need to learn about investing and then invest your money with an investment vehicle that you know and comfortable with. Don’t let it just staying in bank account. Beat the inflation and go toward your own financial freedom.

Hope this helps.

Hear Robert Kiyosaki yourself: rich_dad_difference3

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• Improve Your Finance Position: The Big Picture
• Debt is Good: Only for Investing & Business Though
• Debt Is Bad: Insight From Franklin and Gandhi
• Inflation Is NOT Price Goes Up: Common Misconception
• Offset Account, Tax and High Rate Term Deposit/Saving Interest

This is the latest brochure I read: “Buy Fujitsu Reverse Cycle Inverter Split System for $1596 (after $200 “free money” via redemption from supplier). Meaning: you need to pay $1796 first, file a claim (as simple as filling an online form), then the supplier will send you $200 back to you…. Easy ? But why not just pay $1596 in the first place ?

Another example, Hewlett-Packard (HP) also use cash back marketing strategy a while back.  I remember getting $75 about 2 months after I purchase my HP C6180 printer as cash rebate. So, big or small company already embraced this strategy.

Cheap & Easy Promotion and Marketing Strategy

Of course this cash back scheme is just another marketing or promotion strategy. The purpose is clear: to make more sales (hence profit) – this is the bottom line – only with 2 distinct significant advantage for everybody:

1. The marketing cost (cash rebate) is self funded (the company don’t need extra money to fund the promotion) as the cost is done after the sales is transacted – making it very cheap cost (no loan or even opportunity cost wasted). Also the cost will be fixed, there will be no over budget: if 1231 unit is sold then the cost is 1231 x $200 (no more no less). All other marketing strategy will involved doing much difficult forecasting of how much more sales will be induced by that promotion effort. So, this cash back strategy not only cheap but also easy. Furthermore, the pay out of the cash back is further months back, hence the company can use the proceed of the sales for something else first.
2. The promotion money is invested in the customer itself (not advertising  media company) , hence in the long term will result in better brand image and brand loyalty for each customer.

Reward The Customer not The Middleman

Behind The Cash

Why not just discount the product ? The answer is: technically the manufacturing company doesn’t know the actual selling price. The manufacturing only can set and know what so called RRP (Recommended Retail Price) , for example a laptop computer has RRP of $1,500. But usually almost nobody will sell at RRP, the retailer will sell for cheaper price say $1,300 and quote “saving” of $200. (sounds familiar ?).

So, if a supplier/manufacturing company wants to give $150 as promotional strategy describe above, they cannot really mention the selling price as it will be different from retailer to retailer. Furthermore, it’s getting more complicated as the wholesale price (the price that retailer pay) also varies from retailer to retailer based on their buying volume, credit rating, reputation, etc. So, even mentioning 10% discount will not give the uniform benefit for every customer.

Therefore, a “cash back offer” or “cash back rebate” is the smart way to reward the customer but not the middleman (the retailer). It makes sure that the end customer is the one getting the benefit and the retailer still need to compete each other to form healthy market with their price. The manufacturing company just need to launch nation wide campaign to mention about the cash back offer.

Another reason to NOT discounting actual price is related to the image of the product. In the competitive market, say printer market. A $400 printer will be regarded as more advanced and “better” than $325 printer. Because it’s so highly competitive, if  a $400 is sold for $325, customer might wonder is there something “wrong” that they don’t know (obsolete product, known bug, etc)…. Hence, still selling it for $400 (and give $74 cash back) is much better strategy than give a discount and selling it outright for $325. It’s all about product image and branding.

What for Us, The Customer?

I would say generally, if you find a cash back offer, it will offer us as customer a genuine saving. It’s not merely a discounted price from already infaled price (again, usually). So, if you found a product that you need and that product offer you a cash back. Go for it ! The benefit is designed (also) for our maximum benefit (not the retailer).

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Definition of Inflation

“Inflation” derived from “inflate” means ‘ to expand or increase‘… What’s expanded/increased ? the economy… In more direct meaning: the sum of money is the one increased/expanded…. How the money got increased ? Some of the ways:

• Government can print some more money.
• New debt is created: for example if the bank give you a new credit card with $6000 limit, then suddenly there is additional $6000 money in the economy (you can spend that debt ‘money’ on anything). Well, imagine if there is 1000 person who got the credit card. The cumulative, there will be $6million additional money in the economy/market.
  
• More money from overseas because they import goods/service from us.  Of course this is have to be subtracted with the money that send overseas because we import stuff from them.

So, nothing to do with the price of anything at all….

Economy Goes Up

The Effect of Inflation

Now, if we have inflation (means more money is available), what happen with the price? It can goes up and down or stay the same depended on the supply. Let see the example below: say there are 5 persons want to buy a Plasma TV. The price of the TV is $3000.

1. Initial Condition: None of them got extra money to buy the TV so, they just pass the shop window with ‘that’ look. Now suddenly all of these people have extra $6000 in their pocket.  Then they all now wants that $3000 TV
2. Condition 1: Unfortunately that’s the only TV left. So, what happen with the price of the TV ? Of course it will go up. Why? Say, a person goes there and tell the shop that he will buy that TV for $3000 as price. But then the 2nd person can make a better offer, say he will buy it for $3500. (Remember that’s the only TV and each of this person have additional $6000 inside their pocket).. and so on. At the end: the TV will be sold with higher price.
3. Condition 2: The shop owner knows about these 5 people, and he quitely make another order and have 5 more TV on the shop so each can have one and the shop will have a nice sale of 5 x $3000. So the price of the TV will neither go up or down.
4. Condition 3: Apparently another shop owner cross the street know about these people too hence he also make an order of the same exact TV to be available in his shop. Not only that since he knows there are potential 5 people who buy and he has to compete with the other shop, he need to decrease the price, say to $2800. He put the big banner in front of the shop. Now these 5 people will likely to buy the cheaper price, hence the first owner will need to decrease the price to match his competitor. (Otherwise all the customer will buy from across the street). But at th end the TV will be sold with lower price.

So the same thing with the economy: even there is an inflation (increase of the amount of money) if the availability of goods are also increased (have more food, more petrol, more TV, more furniture, more houses..etc) then the price will not go up. If the inflation and product growth are in balance, the price will be around the same number.

In another word: the price is not necessarily goes up if there is inflation, it will be fully depended with the supply of the product/goods. The increase of price is only of of the possible effect of inflation.

Inflation on Your Personal Finance

If there is inflation, the only ‘concern’ is when the price goes up with it. This is where inflation makes the value of your money decreasing. Just like ‘Condition 4′ on example above:  for the same exact thing you pay higher price, means the money is not as powerful as before -or- it’s value is decreasing.

In this case, if you have a lot of debt, inflation could be a good thing as you actually pay back the loan with less value in it – i.e: you payback the loan/debt cheaper because of this inflation effect.

Conclusion

The movement of the price (up, down or the same) is the effect of inflation but not inflation itself. And considering the effect, inflation is not neccessarily always a bad thing for everybody.

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