What is Inflation and How Does It Affect You?
By Dan Dulin
It seems reasonable that the value of a dollar today would stay the same as the value of a dollar tomorrow, but that's not the case. Money, in a modern economy, loses its value over time in a process called "inflation." With inflation, the amount of money under your mattress stays the same, but it buys less stuff with the passage of time. Time changes money.
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What is Inflation?[/caption]Inflation is measured by the rising cost of goods and services in an economy. Inflation makes everything you buy more expensive, so the value of your money decreases. A dollar buys four apples today but only three apples tomorrow. A dollar is still a dollar, but in terms of what you get for your money, inflation ate one apple!
Inflation is created when a government adds more money to its economy than what's needed for that economy to function properly. There are a number of ways a government can do this, but the process is generally described as "printing money." When a government adds money to its economy, it typically does so to fund its own spending. This means the government needs more money than what it has received from its citizens in the form of taxes and has decided to make up the shortage by creating new money. This deliberate act creates inflation and decreases the value of all the money in that economy.
Inflation is a hidden government tax paid in the form of rising prices. It disproportionately affects the poor, working class, and people who save but don't invest wisely. To be rich, you must minimize the effects of inflation on your lifestyle and shelter your money from it. Given that inflation decreases the value of money over time, you must put your money to work earning a return greater than your country's real inflation rate. This figure would include the price changes of food and energy.
Example: If your money is in a bank savings account paying 3% interest per year and the real national inflation rate is 4.5% per year, your money is losing 1.5% of its buying power each year (3% interest rate minus the 4.5% inflation rate equals a 1.5% loss). If, instead, you invested your money at a 4.5% interest rate, you break even and your money retains its value. Breaking even on your investments isn't a path to riches. In this example, you could only hope to grow your money if you invested it at a rate higher than the 4.5% inflation rate.
Money is made or lost with time. Your money is working for you only if it's invested at a rate of return greater than the real inflation rate reported in your country during the same period of time your money was invested. Learn what the real inflation rate is in your country and invest accordingly.
There are three kinds of lies: lies, damned lies and statistics;...
Mark Twain (1835-1910)
Excerpts from the new book Be Rich: The Ten Financial Laws of Prosperity. You can get your FREE copy of this information packed book at http://www.BeRichBook.com
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