When you hear your grandparents talk about the price of their house or a loaf of bread “back in their day,” it isn’t because they are out of touch with reality. The fact is prices are much higher than they were several decades ago. This is due to a term called inflation.
What is Inflation?
Inflation is the rise in the price of goods and services over time. Each year, we experience inflation. This is the reason a gallon of milk you buy today will likely be more expensive at this time next year.
When inflation happens, it also means the value of your dollar is less. In other words, your purchasing power decreases with inflation. If you spend $1.00 for a bottle of water today and this day next year it costs $1.05, you are getting less for your dollar.
How Does Inflation Affect Your Life?
If you think about the way inflation works, then you can start to understand how it impacts you. For example, you now get less groceries, less house, less car for the same amount of money than you did a year ago, and even five or ten years ago. You may be spending the same amount every month on your morning lattes, but over time you will get less lattes for that amount of money.
This means you eventually need to increase your income, which usually occurs naturally with a cost-of-living salary adjustment. You may also need to put more money in savings. If you keep the same amount of money in your savings account, over time it will be worth less. To keep up with inflation, you may need to contribute more often.
Now that you know the answer to “What is Inflation?” – are you going to do things differently in the coming year?
– The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.