The Inflation Monster Eats Your Money
First, understand the inflation monster eats your money. As more and more stimulus gets pumped into the economy, the bigger probability that inflation will be more of a factor going forward. In fact, stimulus money will cost some future retirees. Cheap money has to find a home and that drives prices up which is essentially a hidden tax on your standard of living and expected standard of living in the future, especially in the retirement years.
How It Works
Here is how it works. The trend is that over time, the prices of goods and services tend to rise. As a result, the purchasing power of your paycheck, your savings, and your retirement income is reduced.
Many people ignore inflation and look at inflation as an abstract concept they may feel they have no control over. But the wealthy understand inflation and prepare for it, calculating the impact into their budget, their future purchases, and their retirement goals.
Let’s say that in 1980 you received a $100,000 inheritance check. You were diligent enough to put the money into an account earning 2% annual interest. Your hope was that one day it would grow and be enough for you to afford a $200,000 dream home, a brick estate with a one-acre yard, five bedrooms, three garages, and a pool in the back.
After waiting patiently for 40 years, retirement has arrived. The growth of your inheritance money had exceeded your goal. You now have over $220,000. Time to buy your dream home!
But while you waited, inflation was growing too. It increased at the average annual rate of 3.1%—more than tripling the average costs of good, and houses.
Uh-oh, your $200,000 dream home with three garages and a pool in the back is now for sale at over $600,000.
Inflation is financial erosion, a slow and steady force that eats away at the value of your money.
The takeaway is that you can never ignore the impact of inflation on your goals for the future. You need to know how it could impact the value of your retirement accounts, investments, the equity in your home, and the death benefit of your life insurance policy.
If you have not factored in the impact of inflation on your dreams for the future, there is no time like the present. Don’t let inflation eat away at your goals and dreams. Learn how money works or spend the rest of your life working for money.