What Is Inflation?
Inflation is the impact of rising prices paired with the buying power of money decreasing overtime. Meaning a dollar today is worth more than a dollar will be worth tomorrow.
Let’s look at 50 years ago, in 1971, $15.22 had the same buying power as $100 did in January of 2021! A gallon of gas in 1992 was only $1.087, in 2021 it was $3.008. Not all products and services adjust the same, the Bureau of Labor Statistics breaks down price increases for 2021 as –
The average overall inflation rate for 2021 was more than 6.8%. Meaning, $93.82 in January 2021 would have the same buying power as $100 did in December. In 12 months, the buying power of $100 lost around $6.18 in value! To put it better in perspective, a $40,000 salary last year is only worth $37,528 this year based on the 6.8% inflation rate. Which is not a pretty thing to see…
How Does Inflation Impact Investment Returns?
In 2021, I earned $98.26 from a high yield savings account. It took 12 months to earn that return on around $5,000. All in all, my bank account returned less than 2.5%. Meaning… I lost money by just having cash sit in a bank account all year. Why? Well because the buying power of a $100 lost more than $6 in value in 2021. My meager return of 2.5% did not even match the inflation rate, so I lost 4.3% of the buying power of that $5,000 (-6.8% + 2.5% = -4.3%).
Now keep in mind that money is my emergency fund and it’s sitting right where it is on purpose, just in case I need it for an unplanned emergency. But my long-term investments are not sitting in a bank account!
In just the month of December 2021, I earned $93.90 in dividends from my $30,000 brokerage account. In total, my stock portfolio returned just under 22% between the dividends and the market growth of my individual stocks! Meaning my money made money while I was sleeping peacefully even with the high inflation increase!
What Does This Mean For Investors?
If you think that just saving your money in the bank is the long-term answer to retirement, think again! Inflation is the silent killer of monetary gains! Not only did the $5,000 in my bank account lose value due to inflation, I also missed out on the money I would have earned if I had invested into the stock market or a retirement account.
That opportunity cost hits home… When it comes to long-term saving and investing, you need to be smart with your diversification strategy! If you are not at least keeping up with the inflation rate with your returns, you will lose money every year. Be cognizant of how inflation will impact your cost of living in 20 or 30 years from now. The average inflation rate is only 2.54% annually but in less than 30 years, your money will lose more than half of its buying power.
Start investing as soon as you possibly can. Remember, the more time an investment has to grow and compound, the greater the return will be!
© EuduringFinances, 2022. All Rights Reserved.
Resources:
Bureau of Labor Statistics, U.S. Department of Labor, at https://www.bls.gov/data/inflation_calculator.htm
Bureau of Labor Statistics, U.S. Department of Labor, at https://www.bls.gov/cpi/home.htm
Bureau of Labor Statistics, U.S. Department of Labor, The Economics Daily, Consumer Price Index: 2021 in review at https://www.bls.gov/opub/ted/2022/consumer-price-index-2021-in-review.htm
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=emm_epmr_pte_nus_dpg&f=a
Related Posts –
One thought on “Inflation And The Value Of Money Today Vs Tomorrow”
Comments are closed.