When I speak of inflation, I am not referring to one of the complicated financial models and formulas used by the Federal Government, investment firms, or what is often talked about in the media. The “inflation” that I am talking about is how the value, (purchasing power), of money decreases as time goes by.
Remember when you could buy a full sized candy bar for 10 Cents? How about a loaf of bread for 35 Cents? How about the commercial where a large hamburger chain advertised that you could buy a “burger, fries, and a drink” and get “change back for your dollar”?
So why are candy bar prices now approaching $2.00 and fast food “value meals” are getting into the $4 and $5 range? That is the long term loss of purchasing power caused by Inflation.
If you attempt to measure inflation over short periods of time, (1 – 4 years), it is very hard to predict it’s effect on your money. But measured over a longer period of time, (10 – 20 years), we find it’s effect is essentially constant. Over the last 30 years in America, the purchasing power of your money has been decreasing at a rate of about 3% per year on average.
The reason this is important is if you are trying to save or invest money to use at a future time, (such as retirement), you need to understand how inflation affects your money. If your money is not growing at a rate that is faster than inflation, you are losing purchasing power.
If you retired at age 65 and were living on $50,000 a year income. After 20 years, at age 85, your money would purchase a lifestyle equivalent to about $25,000 a year.
Imagine taking what you earn today, cut it in half, and then trying to live on that reduced amount. This is what is happening to so many Americans now.
I hope you aren’t one of them.
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