| Ok - maybe it's more clear if I phrase it this way: You paid 2022 dollars for a mattress priced in 2021 dollars. Because of inflation, 2022 dollars are worth less than 2021 dollars (each 2022 dollar is worth ~93% of a 2021 dollar, if we have ~7% inflation) The mattress would have cost you $2000 2021 dollars if you paid for it immediately. But because you paid the 2021 price tag with 2022 dollars, you are receiving a discount: 2000 * .93 = $1860. You are only paying $1860 2021 dollars, vs the 2000 you would have paid. Now - and this is very important - none of this matters if you're just shoving those dollars under your mattress for a year. You have to be taking advantage of the inflation by buying an asset that holds its real value over time, and then exchanging it back for the nominal value in 2022. As an example - assume that we have ~7% inflation, and the total stock market is exactly flat: it neither gains nor loses value compared to inflation (its real value stays the same). You have exactly $2000, and the mattress costs exactly $2000. Option 1: you pay right now. End result: you have 0 dollars. Option 2: you pay one year from now, and invest the 2000 in the market until then. End result: after 1 year, when you sell you investments, you have 2140 dollars. you pay 2000 for the mattress. End result: you have 140 dollars. That's the discount. Now - the Corollary to this is that you have taken on risk. It's possible that the asset you buy won't hold real value compared to inflation. So while you stand to potentially make 140 bucks in a neutral situation, you also might end up losing money on the assets you buy, and not being able to pay the 2000 dollars. Such is life. |