I am a big proponent of keeping up with inflation. I will always try to do, at the bare minimum, just that; keep up with inflation.
Average inflation, depending on where you look, will be anywhere from 2% to 3% per year. Remember, this is just an average. For the sake of this article, I will use 3%, as that’s what I normally use in my personal finances.
What does inflation mean? The simple definition is, a general increase in prices and decrease in purchasing value of money. It means $1 today is worth more than $1 a year from now. If we assume 3% inflation over the next year, your dollar today will only be worth .97 cents this time next year. What cost a dollar today, will cost $1.03 next year.
Ok, so big deal, right? What’s .03 cents anyways? Honestly, it’s nothing. So let’s ramp it up a bit.
Let’s say you want a new washer and dryer for your house. Right now, the set you want is selling for $1500 (for washer and dryer). But, you decide you don’t have the money right now, and need to wait a little bit. Next year rolls around and you go to look at that washer and dryer again. But now, it’s not just $1500. It’s actually $1545 due to 3% inflation. Ok, so $45 isn’t a make or break amount for most people, so let’s ramp it up a little bit more…
You have saved $10,000. Your plan is to have that money set aside for a rainy day. Ten years goes by, and you have been a good little saver, and not touched this money. However, what $10,000 bought ten years ago, will now cost about $13,400 due to inflation. Your $10,000, isn’t $10,000 anymore. In fact, you have lost about $3,400. You weren’t robbed, you didn’t lose it, and you didn’t even know anything was happening to it. But it’s gone!
INFLATION INFLATION INFLATION! I am huge on high-yield savings accounts for this reason. A high-yield savings account will not make you rich, and it won’t fully keep up with inflation some years, but it will help and is a lot better than a measly .06% at a big bank.
I will go into inflation and what causes it in another article; the scope for that is much larger. But it is real, and it happens every year. Very rarely do we experience deflation… usually it’s inflation.
Ever wonder why prices are going up at the grocery store? Partly because of inflation.
Categories: Financial Health