How can you make a 100 thousand dollar profit on a home sale but not be wealthier? When the price of everything increased (as measured with dollars).
If your home is worth $100K in 2005 and the price of lunch is $5, then the home is worth 20,000 lunches. If in 2017, the home is worth $200K, but the price of lunch is now $10, the home is still worth 20,000 lunches.
Your home doubled in price but so did the cost of lunch. This likely happened because the banking system doubled the quantity of dollars, making them worth half as much. You have twice as many dollars, but they’re worth the same as before.
A key point here is to value your money, not count it. Measuring profit by counting, makes the profit 100 thousand of dollars. Measuring the profit by valuing, makes the profit zero.
In the scenario above, capital gains taxes make the home seller poorer than before. A tax of up to 28% will be calculated based on the number of dollars. The profit, via counting, will be reduced to 68 thousand dollars. The homeowner’s net worth, valued in lunches, will now be 16,800 lunches. A loss, when measured in lunches.
Going further, how do you measure the value of your savings account? You may have 1,000 dollars one year and two years later still have 1,000 dollars, but the value of the dollars may have decreased. When valued in lunches, you may have 200 lunches at the start, but only 190 lunches two years later.
Measure the value of your savings using the price of something you purchase regularly. Value your money, don’t count it.