Almost everyone has heard of the word "inflation" before, but many of these people do not comprehend its significance. And those that do understand it, usually try very hard to not think about it. Inflation can be a scary subject, but it doesn't have to be. In this article, I will discuss what inflation is and why you should care.
Defining Inflation
To sum it up, inflation is the cost of items going up over time. There is no real way to know how much these items will go up, but generally, they go up by about three percent per year. There are times when inflation can easily surpass three percent, but usually it is just three percent annually.
Examples
You want examples? How about a candy bar? In the year 1900, a candy bar cost around a nickel. However, these days that same candy bar can cost you between fifty cents to a dollar(or more in some cases). You'll occasionally find a candy bar on sale for twenty five cents or so, but usually it's a bit higher.
How about a house? We'll just say the year is 1900 again. Back in those days, a house would probably cost around ten thousand dollars(more or less). Today that same house would probably cost between a hundred thousand dollars to a few million dollars.
It just depends on where you're located. California, Florida, and New York are more likely to have houses that sell for a few million dollars. But Wisconsin, Kansas, and Arkansas are more likely to have cheaper homes.
Another example of inflation would be a car. Back in the sixties, you could buy a new car for only a few thousand dollars. And gas was only around thirty cents per gallon! It's a pity that it isn't the same today, huh? But don't feel too bad. There's a catch to all of this. People made less money in the past, which is why things were cheaper back then.
However, if inflation becomes too high then it will outpace the current cost of living and you would no longer be as wealthy as you were before inflation got out of control. This would make many of us poor, or at least make us feel like we were poor.
Why You Should Care
Again, if inflation does become too high then your money will not have as much buying power. So if you want that fancy flat-screen tv then you better hope inflation stays within the norm, or else you may just have to stick with your old bulky tv. Also, do you want to be able to retire? That's right, inflation can ruin your retirement plans if it gets out of hand.
And even if inflation doesn't skyrocket, you still should be aware of it. Remember, on average, inflation increases by three percent per year. This means that if you have thirty or forty years until you plan to retire then you better have a lot more than a million dollars stashed away.
You'll probably need around three or four million dollars in a tax free account in order to retire comfortably. And that money may have to last ten, twenty, thirty, or more years. Who knows how modern medicine will change our lifespans in the future. Inflation will never take a vacation so be sure to plan ahead.
Inflation can be a nightmare if it gets out of control or even if it stays within the norm. However, we all have to live with it and deal with it. Now, you should at least have an idea of what inflation is and why you should care. How you decide to combat it is up to you.
