In the news recently, there have been many stories about the impact the inflation is having on communities across the nation. While these stories generally focus on the widespread effects of inflation on entire segments of society, they rarely focus on the impact that inflation is having on the average individual. There are many different ways that inflation can affect your life and learning how to recognize the effects is the first step in being able to limit the amount of damage that inflation does to your finances.
Reduced Purchasing Power
The most common effect of inflation is reducing your purchasing power for goods and services. When inflation raises the cost of goods and services, it takes more of your money to purchase the same amount of stuff that you were buying before. When I first got my driver’s license and began driving my own car, the cost of regular unleaded gasoline was around $1 per gallon, meaning I could fill up my Dodge Neon for around $10. Today, the price of gasoline is nearly three times that amount, resulting in my paying $30 or more for what I could obtain for $10 a decade and a half ago.
Another common effect of inflation is increasing the value of certain types of possessions. This is typically seen in homes, investment properties, stocks and other financial accounts that tend to increase in value the longer that you hold on to them. This type of inflation is great if you purchased the item before the value rose, but these values can decrease as well, leading to financial trouble for those who depended on these assets for financing other area of their lives. For example, during the financial crisis of 2008, the deflation of home prices resulted in many homes losing around 30% of their value, pushing many buyers that had purchased their homes in recent years underwater on their mortgages and resulting in a significant loss of equity for those who had been living in their homes for a long time.
Difficulty Planning For The Future
Inflation brings a lot of uncertainty to financial planning, making it much more difficult. Because there is truly no way to know for sure whether a particular item will increase or decrease in value, you must make an educated guess and rely on past trends when making financial decisions that will affect your future. When making plans for the future, you should include an inflationary formula in your calculations to ensure that you are close to your financial targets. It is better to have more than you need than to struggle financially because you failed to account for inflation in your planning.
Join our newsletter
Subscribe to get the latest "Engineer Your Finances" content via email.