WHAT IS INFLATION?
All of us complain of a price rise. This increase in the price of things you buy or the services you use is called inflation. When the price of things rises, your dollars end up buying less of them. Over the last few decades, the US has been seeing an average annual inflation of about 3% which is a fairly stable value. The graph alongside, from Wikipedia Commons shows how the US has fared as far as Inflation is concerned. Notice that both positive and negative inflation has been encountered.
HOW DOES INFLATION AFFECT YOU?
The historical average value for the last few years shows that you can expect the purchasing power of your savings to reduce by about 3% over time. Also notice that there have been many years when inflation has been markedly higher. If you have saved a certain amount for your future, inflation will eat into its purchasing capacity every year. You could reach a situation when you find yourself badly short even though you have been able to meet your target savings amount.
SO WHAT CAN BE DONE?
When you invest your funds, you need to look at two essential things – safety and the ability to beat inflation. If the rate of interest you are able to earn is lower than the average inflation, then you are actually loosing purchasing power even though your money may be growing in numbers.
Key questions we need to ask ourselves are:
- Is my savings keeping up with inflation?
- Is my income keeping up with inflation?
- If not, what do I do to keep up or outpace it?