There has been a lot of talk about inflation lately, but what is inflation and why is it important to plan for it?
Very simply it is the concept of a dollar today is not worth a dollar tomorrow. I like to explain it like this:
How much was gas when you started driving? Maybe you don’t remember but for me it was around $1.15 per gallon. Today the average is around $3.70 per gallon. Granted I have been driving for more than 10 years but in that time prices have more than doubled. How does this happen? Think about housing prices. How much you pay today will be significantly more than the amount your parents paid, especially if you live in California. Why so, inflation.
Inflation comes about in different ways.
The two simple ways are, first the supply of the dollar, our currency, increases. This leads to the value of the dollar decreasing, because there are more of them. Think about selling something on eBay. Do you want there to be a lot of people selling exactly what you are selling or would you rather there only be a few so that you can set the price?
The second way inflation happens is through the increase of prices, as I illustrated above in the items we purchase everyday. Or said another way, an increase in demand with lack of supply. The more people want of something the more that price is bid up when supply is weak. Using the previous example if you are bidding on one of something on eBay, how much more do you have to pay than if there were thousands of the same product?
Even with those two simple examples of inflation, why is it important?
Think about all the things that you plan in your life. Vacations, retiring, budgeting for everyday needs. How are you accounting for inflation? Are you thinking that by saving up now your money will be worth the same when you retire? What’s your plan to combat inflation?
College tuition is a great case and point. Until a couple of years ago your parents could afford to pay for your college. Now, the tide has turned and prices of tuition have inflated so high, it’s almost impossible to save for a child’s college education. What is the solution to this; parents delaying retirement savings to help their son or daughter pay for college. Because you have to get a college education in this day and age the demand has gone up, yet the supply has not changed. Ah, inflation!
The most important things in your life could be impacted by inflation, time to start paying attention.