In recent months, there has been a lot of talk about inflation and its effects on the economic well-being of the country. Inflation can affect consumers positively or negatively depending on the situation and the assets owned by the individual, but many do not realize the widespread effects that inflation has on their lives. Here are some of the many ways that inflation can affect your life.
Effects On Your Buying Power
The effects of inflation on your buying power is generally negative. As inflation increases, the prices of goods and services increase, so each dollar buys less and less. If your income does not increase along with the rate of inflation, then your buying power diminishes and you cannot purchase as much as you could before. For most people, the main consequence of inflation is a subtle reduction in their standard of living.
However, people can and do benefit from asset inflation, especially in housing and in stocks. If the person owns the asset before inflation causes the value to rise, they can sell the asset later for more than they paid for it and pocket the difference. Inflation does not affect all things equally, so it is possible for some assets to rise in value much more quickly than others.
Effects On Your Retirement Planning
Inflation can wreak havoc with retirement planning because there is no way to predict how much inflation is going to affect the costs of the things you need between today and the day that you retire. It is safe to assume that inflation will continue to rise and you will have to pay more to maintain the same quality of life. This means that you will need more money each year than you are spending now to purchase the same things during your retirement years.
Because the future rate of inflation is unknown, many people choose to use a rate of 3 percent per year for their inflation calculations when they are planning how much money they will need for retirement. This is slightly higher than the generally forecasted inflation amount of 1.5 to 2 percent each year to take into account any years when the inflation rate is higher than that. While inflation may not average 3 percent a year between now and when you retire, using that number will get you in the ballpark of where you should be with your retirement savings.
Join our newsletter
Subscribe to get the latest "Engineer Your Finances" content via email.