Even for those who find ways to increase their incomes or control their spending, inflation can creep up and diminish the value of savings over time.
“Inflation is definitely the main culprit when it comes to taking away the purchasing power of the dollar,” said John Bouman, an economics professor at Howard Community College. “If you?re always saving at a fixed rate, you?re going to lose value in your money in the long run.”
The impact of inflation is evident every day in price increases for food, clothing, appliances, energy, automobiles, prescription drugs and health care. Inflationrates in the United States have remained fairly steady in the past 15 years, increasing by about 3 percent annually, Bouman said.
“Many people aren?t concerned with inflation, because it?s held pretty steady,” Bouman said. “When the inflation rates start to change, it can be worrying to people, because they?re unsure if they?re making or saving enough money.”
Over time, inflation can sneak up on people like “a stealth bomber” on wealth, said Leonard Raskin, president of Sparks-based Wealth Advocacy Partners.
“You don?t pay it or feel it, but inflation is eroding the value and purchasing power of your dollar,” Raskin said. “If the costs of goods and services are growing at a significant rate, every dollar you put away is eventually worth dramatically less.”
Raskin provided this example: If a 45-year-old put $100,000 under his or her mattress for 20 years, that $100,000 would be able to purchase $55,000 of today?s goods and services.
“With average inflation rates, you?re losing 45 percent of the value of a dollar over 20 years,” Raskin said.
To counteract inflation, Raskin suggests people invest in assets that traditionally benefit from inflation.
“Paper assets like stocks, bonds and bank accounts are most affected by inflation,” Raskin said. “You need to own assets that inflation helps, like gold, real estate investment trusts, lumber and oil.”
Inflation rates differ from person to person, Raskin said. A person?s age, family situation, health, occupation, buying habits, geographic location and lifestyle all contribute to an individual inflation rate.
“Young people might not be concerned now, but parents are concerned with rising college tuition costs, and people over 65 are thinking about rising medical costs,” Raskin said.
Countering Inflation
» Acquire and retain assets that historically have been hedges against inflation.
» Save and invest at least 15 percent of your annual income.
» Control your expenditures any way possible.
» Understand inflation is difficult to quantify, and your rate will differ from others.
Source: Wealth Advocacy Partners
