Everything in finance is about different rates of change

Not budgeting hacks. Not timing the market. Not cutting coffee. The difference between building wealth and quietly losing it comes down to understanding one thing: what grows faster than what.

Cameron Drury  ·  Co-Founder, Canwi

A millionaire founder I once spoke to - who made his fortune selling mobile phones before most of us even knew what "4G" meant - shared a line with me that I've never forgotten.

"Compounding is a miracle when working for you. But deadly against you."

Then he followed it with something even more precise:

That's it. The whole game. Not a spreadsheet formula, not an investment strategy - just an idea. Because different things in your life grow at very different rates, and where you position your money relative to those rates determines almost everything about your financial future.

Groceries grow at the rate of consumer inflation. Wages grow at the rate of wage inflation. Property grows at the rate of housing price growth. And those rates are not the same. That difference is where wealth is either built - or quietly eroded.

What is inflation, really?

Inflation simply means your money loses purchasing power over time. A dollar today buys more than a dollar next year. If inflation is running at 3%, something that costs $100 today will cost $103 in twelve months. The product hasn't changed. The value of the money has.

The Reserve Bank of Australia targets inflation between 2–3% per year - the idea being that modest inflation supports stable economic growth. But when it runs hotter than that, as it did when CPI peaked at 7.8% in December 2022, the erosion becomes very noticeable, very quickly.

Here's the part most people miss: inflation doesn't erode in a straight line. It compounds. And that distinction matters enormously.

Inflation isn't one thing - it's many

Here's where most people get confused. There isn't just "inflation." There are multiple rates of change happening simultaneously, and they diverge in ways that matter enormously over time.

1. Consumer prices (CPI)

CPI measures the cost of everyday goods and services - groceries, rent, transport, a pint at the pub. The Australian government targets 2-3% per year, which is why assuming 2.5% for general living costs is a reasonable planning assumption over the long run.

2. Wages (WPI)

Wage inflation measures how much pay for the same job increases over time - not because of promotions, but because of economy-wide wage growth. Treasury's 2023 Intergenerational Report sets the long-term wage growth target at 3.7% per annum, which is the default Canwi uses in its model.

But here's the catch: when CPI and WPI diverge, real wages - what your pay actually buys - can go backwards even as the number on your payslip goes up. In 2022-23, CPI ran at 5.1% and then 7% while wages grew at just 2.4% and 3.7%. People were earning more dollars. Those dollars bought less. In real terms, the purchasing power of a $100,000 salary was set back to roughly 2010's equivalent.

3. Property

Property prices have historically grown much faster than CPI. In 1970, the median Sydney house cost around 4.5 times the average annual income. By 2020, that figure was closer to 12.2 times. That's not just inflation - it's a structurally higher rate of change. Over long periods, residential property in Australia has often grown at 6–10% per year, and in specific cycles considerably more.

4. Debt

And nowhere does compounding become more dangerous than with high-interest debt. Consider a $50,000 credit card balance at 18% interest. At that rate, money roughly doubles every four years. That $50,000 becomes $100,000. Then $200,000. Then $400,000 - not because you spent more, but because the rate of change was working against you, relentlessly, in the background.

This is the same compounding effect that builds wealth in assets. Applied to liabilities at high interest rates, it does the opposite.

That said, debt isn't inherently bad. The rate attached to it - and what you do with it - is what matters. Borrowing at 6% to invest in something growing at 10% means the rate of change works in your favour. That's leverage, and used wisely it accelerates wealth creation. Used poorly, it accelerates its destruction.

Positioning yourself on the right side

Most people think wealth is about spending less than you earn, saving harder, or cutting back on things that make life enjoyable. Those things aren't wrong. But they're not really where the game is won or lost.

Real wealth is built by positioning your money where the rate of change works for you instead of against you. Here's roughly how those rates stack up over the long run:

Compounding at 8% builds wealth. Compounding at 3% just preserves purchasing power. Compounding at 0% slowly destroys it. And compounding at 18% - on the wrong side of the ledger - is financially devastating over time.

The decisions that determine which of those rates you're exposed to - and on which side - are the decisions that matter most. Not the ones you agonise over most often.

Why this is so hard to see in real time

None of this is obvious day-to-day. You don't feel inflation compound. You don't notice your real wage going backwards in a single month. You don't see the opportunity cost of cash sitting in a transaction account accumulating in a single statement.

That's what makes it so insidious - and why modelling it properly matters.

- Cameron

General information only. This article is intended for educational purposes and reflects the author's personal views. It does not constitute financial product advice. Historical rates of return are not a reliable indicator of future performance. Always consult a licensed financial adviser before making investment decisions.