Inflation is something we hear about all of the time but may not fully understand. It can have very pertinent effects on our spending habits and if it is not taken into account when making long term financial decisions, it may serve as a very negative realization far down the road. Inflation, put most simply, is the gradual rise is the cost of goods and services over time. If it creeps up too quickly, you can see demand for a certain product fall almost overnight. If it doesn’t rise fast enough, you can see wage stagnation over time. For ease of discussion however, it is generally accepted among consumers that inflation is a negative thing because it means more money will be coming out of their pocket tomorrow for the same products that they were buying for a cheaper price yesterday. In essence, your buying power in the market has gone down because the cost of goods has gone up while your annual income has remained the same. A higher percentage of your paycheck each week or month will have to go to necessities thus leaving far less for things like savings and non essential or “fun” purchases. Also, retirement can become a much cloudier conversation if inflation takes too big of a toll on your savings. As you grow older the cost of things will typically rise so the value you were shooting to save for retirement 20 years ago may be far less than you’ll actually find yourself in need of to retire in the manner that you wish to or are accustomed to living. Last, but certainly not least significant, is that inflation tends to drive up interest rates. This means that when you go to look for a loan to buy a new house or a new car, you will end up paying far more money back to the lending institution in the long term.
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