Why your view of life and money really depends on where you’re standing.

Einstein’s theory of relativity, published over a century ago, was truly groundbreaking. His discovery has resulted in innumerable scientific advancements that shape life as we now know it, from how we heat our homes to the way we navigate roads.

But never fear, we’re not about to delve into a physics lesson; it’s actually the idea of relativity itself – what is ‘here’ and what is ‘there’ – that’s particularly interesting.

An easy example is that if a person on a moving bus throws something to someone on the pavement, the object will appear to be travelling much faster to the person on foot. This is because they can perceive both speeds (the speed of the moving bus and the speed of the moving object), whereas the passenger only perceives the speed of the moving object. In a nutshell, our understanding of life boils down to where we are (literally or figuratively) and how we view things.

From a financial perspective, it’s arguable that everything is relative. How many of us dreamed of being millionaires as children? At the time, this was obscenely aspirational; today, it’s far more achievable. In this one way, it’s now easier to be “rich” (by our old yardstick) than it used to be.

Of course, it’s never that simple. If we look at it another way, our perception of what it means to be “rich” has also changed over time, and due to inflation – that insidious thief – you’re no richer now than you were before. In fact, everything is more expensive. Back in 1990, a loaf of bread cost around 50p; today, the same product will set you back about £1.06. From a simplistic view, £10 in 1990 could buy a lot more than £10 in 2021.

A pertinent example from our times is wage inflation versus house prices. If you have £1 million but can’t buy a house in London, are you a success or a failure? And if house prices go up, are you really going to be any richer at the end of it? Unless you plan to downsize, when it comes to a home, cost and value are largely meaningless.

Right now, there’s plenty of concern about the inflation rate vs. interest rates, which is broadly like comparing the cost of buying things with the amount of money in your pocket. It’s fair to say that nobody wants to end up in a situation where a loaf of bread costs £1.06 and you only have £1.02.

Quantitative easing is desperately trying to break that relativity link, but the unavoidable fact is that the money is going somewhere. In the short term, having more money in the system feels better than too little (just as furlough, funded by easing, felt healthier than job losses). It’ll be interesting to see how this plays out, however; it may well be the case that the extra money in the system naturally finds its way into the pockets of a wealthy few, restoring some form of equilibrium for the rest of us.

So, as adversarial as it may be, it is your relativity of wealth compared to your benchmark, or the norm, that matters.

If you’d like help with wealth planning and feel you’d benefit from a holistic view of your circumstances, get in touch with our team.