What is inflation? More importantly, have you thought about the effect of inflation on your money?
Let’s first start off by answering the question “What is inflation?”.
The textbook definition of inflation is the increase in the price you pay for goods and services over time. Inflation is something that comes with your money, and that you don’t have any control over. It is the driving force that increases the prices of all the goods that you spend your money on.
Now, let’s translate this definition inflation to actual daily experiences.
Because inflation is the increasing price of goods and services over time, you will notice as time goes on, that the price that you are paying for goods and services today will be considerably less than the price that you are going to pay for the same goods and services in the future.
Let’s say for example that you go to your local market tonight and buy a loaf of bread for $4 and a carton of eggs for $5. That’s today’s market value for these goods. But what did the same loaf of bread and carton of eggs cost five years ago? Somewhere around $2.50 for the loaf of bread and $3 for the carton of eggs. The items did not change but the price did? Why? Simple, because of inflation.
This is the effect of inflation on your money.
Inflation drives up the price of your necessities like food, gas, and services. As well as, your lifestyle expenses like travel, entertainment, and let’s not forget shopping. This increase in the price that you pay for things and the effect of inflation on your money, would not be as big of an issue, if your income increased equal or more, to keep pace with the yearly inflation rate increase. But 95% of the time this yearly income increase does not happen.
Inflation is the increasing costs of goods over time, and the decreasing purchasing power of your money over time.
This decreasing of your purchasing power not only effects your money now, but will continue to affect your money 10, 20, 30 + years from now into your retirement years. In fact, inflation can negatively impact the future you and your money if you don’t take action to hedge inflation now.
What can you do to make sure that you are outpacing inflation?
There are several things that you can do with your money right now to make sure that you are putting yourself and your money ahead of inflation.
– First, search for and find out the current US inflation rate on the internet.
– Lately, the inflation rate has been somewhere around the 3% rate annually.
– Inflation will cause the goods your buy to increase in future price. What you can do now is make sure that in the places you are saving money mid-term and long-term are giving you an averaged rate of return greater than the inflation rate. If these accounts are not giving an average rate of return greater than 3% you can choose to put your money into higher yield accounts.
– Talk to a financial professional about some options that are available to you that can help you get higher potential interest returns on places where you are currently saving.
– Future projecting how the effect on inflation on your money by using online calculators. This exercise will help you see how much long-term money you need to have in order to live the lifestyle you want to live while taking into account inflation. You can use calculators like Inflation Calculator to give you an idea of how inflation directly affects your future money. Input the dollar amount of your current monthly expenses into the second calculator titled “Forward Flat Inflation Rate Calculator”. Also, input how many years in the future you want to calculate for. Afterward, click calculate and you will see, in dollar amount, the effect of inflation on your money.
Inflation is a very important money concept that if allowed to go unchecked can errode the value of you money over time. Are you ready to make sure that inflation is accounted for in your personal financial plan?