You hear the word tossed around all over the financial news, but how inflation affects your money can infeel like a mystery. Economists and experts mention the word inflation in a way, that makes it sound like a really huge deal. But you're never sure how much of a big deal it is for you because the basics are usually not explained
The inflation rate is an indicator that tells you how much the prices of things go up in your country.This means that the buying power of the country's currency decreases because the cost of things has gone up. So for example, the price of a pair of jeans is currently $100 and the inflation rate is 2%, this means that the price of the same pair of jeans changes to $102. Inflation rates can affect prices immediately or over the course of a year.
If you want to totally understand what inflation really means, think about what life was like in the 50s. In 1950, the dollar had a high value, and the average cost of a house was roughly $7,354 while tuition to the University of Pennsylvania was around $600 a year. Can you believe it? Compare that to the current prices, and you will be astounded at how much the dollar has depreciated in value. As the years continue, the prices also keep going up. You can also imagine that in the ’50s people used to make a lot less money than they do now, but the amount they had came with a lot of value.
How Inflation Affects Your Money In Savings
With time, inflation reduces the value of your savings, because the prices have gone up, and the value of the same amount of money next year, is not the same as this year. You can easily notice this with cash. For example, if you kept $10,000 under your bed for the next 20 years, chances are that it will not buy much when the time elapses.
You haven’t really lost the money, but inflation has eaten into its purchasing power, and now it’s worth much, much less than it did 20 years ago. However, keeping the money in the bank is a better idea, because here, it shall earn some interest. The interest you earn can be used to balance out some of the effects of inflation. When the inflation rate is too high, the bank is likely to pay a bit more interest.
How Inflation Affects Your Money In Investments
This depends on the type of investment you have. If your investment has a set annual return, such as certificates of deposits, or bonds, the inflation rate can greatly hurt your performance. This is because the rate of inflation cuts into your earning. However, if you have invested in stocks, inflation may have a mixed impact.
When there is high inflation, it means the economy is strong, and companies will tend to sell more stocks, and this could help with the price of their shares. They will however still pay more in terms of raw materials and wages, which may end up hurting the value of their stock. Likewise, precious metals such as silver and gold tend to do very well when the rate of inflation is high because the value of the dollar goes down and they end up costing more.
How To Plan For Inflation
This is one of the reasons why people do not like putting their money in the bank. With time, inflation can erode the value of their savings, and they prefer to invest in high-growth investments such as mutual funds and stocks. The reason behind this is that; on average, these investments tend to earn more each year, than the inflation rate.
When setting up your investment portfolio, it is important that you consider the inflation risk, for fixed investments such as fixed annuities and bonds. These are usually adversely affected by inflation. Diversify your investments and choose to add minerals such as gold, or other inflation indexed investments into your portfolio.
How Inflation Affects Your Money Conclusion
Inflation is a force that is hard to ignore or avoid because it doesn't depend on what you are doing, but rather on markets all over the world. By planning for how inflation affects your money in advance, you are able to accurately control how it can affect you. Putting your money into things that don't lose value can help you keep above yur inflation rate.
Planning ensures you have put a strong investment strategy in place. At the end of the day, inflation actually means that you shall pay more for goods and services than you did before. This is why you must try to beat it at its own game. Of course, inflation rates vary highly across the globe, the country you live in may experience low to no inflation while another could have almost everything doubling in cost. Planning ahead and being aware of your country's financial health will ensure you maintain your financial health too.