Effects of Inflation
The effects of inflation on my money
In the May 2008 Money magazine they had an article titled, “Life in the time of inflation.” They mentioned how the price of milk is up 13% over the last year, hospital costs 8%, and of course gas up 33% . Overall inflation being up about 4%.
There are lots of effects that inflation has on the world, our economy, and our personal lives, but I think one of the most important ones for us to be aware of is how it affects our cash.
Cash sitting in our wallets, under the mattress and even in many savings accounts is becoming less valuable because of inflation.
At 3% inflation (which I think has been the average over the last decade in the U.S.) we are essentially losing money when our cash is not earning at least that amount in interest. So, if you have a savings account that pays 1.5% interest and inflation is at 3%, you are losing spending power.
Even though your total balance in your savings account may have gone up, you will be able to purchase less with that money because of inflation.
How to best handle inflation
By having a savings interest rate that is higher than the inflation rate, you can take comfort in knowing that your money is growing in dollars as well as spending power. In times of high levels of inflation, this most likely will not be possible.
Bank CD’s often offer higher rates of return than savings and money market accounts, in exchange for promising to keep your money there for a fixed time frame.
Stocks, index funds, and mutual funds all generally offer good protection against inflation.
How to benefit from inflation
Fixed-rate debt - your mortgage, car loans, or any other loans you have at a fixed rate will be beneficial to you as the borrower. For instance, if you have a 30 year mortgage, every year further into the loan you go, you are actually using less of your spending power to pay the bills.
In theory, if inflation goes up in the U.S. by 4%, our living expenses will rise by 4%. Then (in theory) our incomes rise by 4%. But, your fixed rate debt doesn’t rise. Therefore, with all other things being equal (and assuming that we have a constant rate of inflation) your mortgage payment should be easier to pay each year as you get further into it.
This cycle is amplified and you see much greater benefits from it in periods of high inflation. The bank who made the loan pays the price because even though they are getting the same payment each month, it become less and less valuable as the loan progresses.
Bottom line: Inflation is likely to always be around, we might as well learn how to make the best of it.
Ducktales explanation of the effects of inflation
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Filed under Christian Financial Help
Comments on Effects of Inflation »
I think most of the time people do not notice inflation that much as it rises quite slowly. I think because of the large increase in fuel, it has had a knock on effect for everyone and we are really noticing it at the moment. It is a good thing in the sense that it is teaching people how to be more frugal, which is always a useful skill to have.
Excelllent post.
Finding the 4% savings rate is the problem. Alliant CU has one (4.00%) and so does AARP (4.75%). The AARP is done through a custodian account held at Huntington NB, I believe. I would provide the links, but many comment sections don’t allow that.
The other thing to keep mind is that some places offer above market teaser rates and a few months down the road, drop the rate. So value of your time is also important to consider. If you get a 4% today, but 60-days from now it goes to 3%, you have to spend time searching again and transferring your funds.
Sometimes that time could be spent on little ventures that also earn you extra funds.
@Savings
good point about the teaser rates
Ah, yes…the effects of inflation. Since the inception of the Federal Reserve in 1913 the value of our dollar has decreased significantly. A dollar today is worth about 4 cents compared to a pre-1913 dollar. Before the creation of the Fed, our dollar incurred virtually no inflation (except a short stint during the civil war, but it went back to normal).
When the Fed cuts the key rate (as we’ve seen a lot of lately), they essentially flood the market with money. The more money they pump out, the higher inflation goes…the less your money is worth. Unfortunately, that’s what happens when you have a fiat currency — where the money is backed by nothing (not gold, silver, etc.) but speculation and the word of the Federal Reserve.
@Tristan
thanks for sharing, where can people watch that video about the Fed if they are interested?
Well, I wasn’t going to post that here, but since you asked…
For those of you who don’t know much about the Federal Reserve/IRS/Income Tax, there’s a great documentary out there called “America: Freedom to Fascism.” The title may sound a bit abrasive, but I believe the content is very revealing about the purpose of the Fed/IRS. After watching this documentary and doing some research on my own, I became convinced that Federal Reserve and the IRS should be abolished. Our founding fathers would agree.
The DVD is available at NetFlix and other place’s like Blockbuster, but you can watch it for free (somewhat low visual quality) on Google Video here: http://video.google.com/videoplay?docid=-1656880303867390173
I urge everyone to watch this documentary and research the facts. Please, no hating until you’ve done your research!
Ok, enough from me. It’s not my intention to detract from the thread. Carry on!
@tristan
Good, I am going to have to check that video out - I would like to find out more about the FED’s role in all of this…
Its very simple explanation….Wanna typical side of it???