Inflation… What's that?
It’s been around since the beginning of time and has had the most impact on our finances, especially when it comes to savings.
$0.25 Big Macs are a thing of the past! They may still look and taste relatively the same but their price has skyrocketed. The same is true for our cost of living - it has been constantly increasing over time. Just look at the housing prices these days vs. 30 years ago. This is inflation.
When it comes to inflation there are many factors involved. Money supply is at the heart of it all. If there is more money in circulation, prices go up. Also, in North America under the current monetary system, the Central Bank governs our monetary policy and plays a critical role on the rates of inflation.
Every year our cost of living has increased and the goods we buy have increased. But how much has your income increased year over year? If your income is not keeping up, you are losing your purchasing power. This is why it’s so important to look at your savings because this is where you will turn to when you need some extra money to cover increased costs.
Inflation has a significant impact on the power of our savings. If your savings are not invested in vehicles that are appreciating over time, you may find yourself losing money every day. You should always be investing in vehicles that give you an interest rate or rate of return that is higher than inflation, which is approximately between 2% - 3% in North America. Over the past couple of years, individuals have saved their money in high interest savings accounts or guaranteed locked in investments ranging from 1.20% - 2.05%, while inflation has been between the 2% - 3% range. If you keep your money in these types of accounts you may not be able to afford a Big Mac when you’re 65 years old!
Take a look at where your money is invested and make sure it is growing more than the rate of inflation. Inflation can be the silent killer of your money and ability to build wealth if you don’t factor it into your overall financial plan.
A great video to watch to further understand inflation and our monetary system is The Economic Time Machine by Ray Dalio.