Thursday, October 24, 2013

How the New Million Dollars is the Old One Hundred Thousand Dollars

Back in the late 1950’s to early 1960’s we would watch a TV program called “The Millionaire”. A very extremely wealthy man would somewhat randomly pick out a person and give that person a gift of $ 1,000,000. The story lines for the show revolved around how said person reacted to being the recipient of that gift and the impact of that gift upon their life. How many of us who watched that show way back when, would wish and think of what it would be like to be the recipient of such a largess. A Millionaire, someone who had a million dollars, was considered fabulously rich and set for life; like Jed Clampet, the mountain man who upon inadvertently finding oil on his land, became a Millionaire and moved to California to settle in the affluent Beverly Hills neighborhood as the “Beverly Hillbillies”.

Then there was the time in one of my high school classes, when the teacher asked us to write a paper answering the question, “What would you do if you had $ 100,000?” Though I did not think of or recognize much of the deeper importance of the assignment at the time, I find it of interest to look back at what I put down in that little essay. In that writing assignment, I used the $100,000 to set myself up in farming. Out of the hundred thousand, based on prices of that time, there was enough to buy an eighty acre plot of land; equipment for a hog feeding operation and the needed field equipment. In today’s world that $100,000 would barely pay for the eighty acres, depending on the quantity of arable acres and general fertility of said land.

Some almost fifty years later, I find it of interest that in that high school assignment back in the mid 1960’s, I spent that money on something that would give me some kind of return on the investment. There may have been enough left for that Mustang I have for ever since regretted not buying, but though I did not deliberately look at it or think of it that way, my focus was on something I thought I would enjoy doing and that would also give me, if managed properly, a steady return and income over time. The other thing I find valuable in looking back on that high school assignment, is to realize just what could have been done with that $100,000 fifty years ago as compared to what can be done with $100,000 in today’s money.

Before I continue, I want to make some other comparisons between the prices of things in the mid to late 1960’s compared to today. This comparison will be given in an anecdotal way as a memoir. That said, the numbers quoted can be easily verified.

I remember when:

Regular gasoline was between 25¢ to 35¢ per gallon. Today it fluctuates, depending on where you live, from $3.00 to $4.00 per gallon. To make the math easy let me put it this way: The gallon of gas I paid 35¢ for now costs me $3.50; a tenfold increase in price.

A loaf of bread could be had for 25¢. Now days it is hard to find a decent loaf of bread for less than $2.50; another tenfold increase.

Hamburger/ground beef could be had for 24¢ per pound; now days expect to pay $2.50 or more depending on quality or if on sale; another tenfold increase.

A week’s wages of $70.00, based on $1.75 per hour over a 40 hour week, was considered a decent wage, and a family could make due and get by on it. Now days, I can easily spend $70.00 a week on groceries alone. Or if I didn’t want to eat, I could use $50 to $60 of it just to fill a gas tank that I use to fill for $3 to $4 in 1965 money, and just maybe I would have enough left over for the $12.00 haircut that fifty years ago I paid 75¢ for.

Do you get the picture?

I could go on and on, but don’t take my word for it. Go to Google or any other WWW search engine and do a search on “1965 prices”. You will find all the data you need and more to substantiate the observations I have made from memory.

The raw fact is that $1,000,000 in today’s money only has roughly the buying power of what $100,000 use to have back in the mid 1960’s. To have in today’s money the equivalent of what $1,000,000 was fifty years ago, you would need $10,000,000. “The Millionaire” TV program from that time period would have to be renamed “The Ten Millionaire”. The 1960’s game show called “The $100,000 Question” would have to be renamed “The Million Dollar Question” as we have found in “Who Wants to be a Millionaire?”

Those of us in the Baby Boomer generation know all this. We may not think about it much; we may and do ignore the evidence before our very eyes over the last fifty years. We may not think it matters that much, but my point is, if we thought about it seriously, the history we observed and lived through tells us something about the nature of money in our economy over time and how in that light we should view investments and savings.

To quote Ronald Baron in a recent Baron Funds Quarterly Report (September 30, 2013):

"Virtually all currencies either die or are devalued. That is why we believe currencies are useful to buy and sell things, not as a “store of value”."

The point Baron makes sheds a bright beam of light on the Achilles’ heel of how the vast majority of us still consciously or subconsciously think about money. Many of us handle our money as though money itself is still a “store of value”.

To help illustrate this, let’s go back to our $1,000,000 in today’s money which as we have illustrated above, is the $100,000 of fifty years ago.

If you put that $1,000,000 in a savings account at a bank or credit union, what interest would you get at today’s rates?

In my latest Credit Union statement, with regard to my savings account I was told my “Annual Percentage Yield Earned (APYE) is 0.05%...” Not much, is it?

A half percent on $1,000,000 is $5,000 per year. Not much, is it? Notice also that $5,000 would equal a 5% return on $100,000. Could you live in the U.S. or in any other developed country on only $5,000 a year? Also realize that over time the future value of your $1,000,000 will continue to shrink in comparison to the value it holds today.

Now do some simple math. If I can get 5% per year on $1,000,000, my gross annual yield on the $1,000,000 is $50,000. I dare say most of us could get by on $50,000 per year if we had to. We would also be better off than 98.5% of the rest of the world’s population. (Notice I am leaving Social Security out of the discussion at this point.)

That then begs the question, “What can I put my money into that will give me that 5% or more return per year, and at the same time maintain some semblance of current value over time through growth in so called “capital gains”?”

You see where this is headed don’t you?


More to come in later posts...