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How Inflation Rate Impacts Your Personal Finance

Ever wonder why speculations about inflation rate and the prediction of future inflation are so often mentioned in the media? Why should you be concerned about this figure?

Inflation rate affects the way money moves in the worldwide economy and ultimately, every individual’s finances—including you. Read on to better understand what inflation rate stands for, what causes it to go up or down, and why it concerns you:Inflation Rate Impacts Your Personal Finance

What is Inflation Rate?

To make it a lot simpler, let’s define inflation first. The inflation rate represents the increase in the price of goods and services such as food, transportation, housing, medical care, entertainment, and other consumer goods. You may have heard an elderly person tell stories about how things were different in the old days, and how prices used to be so much lower when they were your age. Did you ever wonder why that is so—why prices before are far lower than prices of goods and services today?

That is essentially what inflation is about.

Inflation rate is the rate or the degree at which prices change. This rate varies in every country and is calculated on a monthly or annual basis. Inflation affects how prices change over time. The most common measure of inflation is through the Consumer Price Index (CPI), which is determined by the overall costs of a typical basket of goods and services individuals buy or use.

Simply put, the current inflation rate dictates the buying power of your money. For instance, if you buy a cup of coffee for $2 this year, and the yearly inflation rate is at 10%. In theory, the same cup of coffee will cost 10% more the next year, or $2.20.

How Inflation Rate Affects Your Future Financial Needs

Going back to the question: why is inflation rate important and how does it affect your finance? Inflation rate fundamentally affects your future expenses. Let’s say you have good spending habits and you’re always sticking to your budget. You spend enough to live your life comfortably and you can generally afford your lifestyle today, but what about five, ten years from now?

When you think about your future expenses, particularly retirement, you have to consider that the amount you save, no matter how big, might not have the same buying power as it does today. And if you’re planning to start a family, you have some other expenses like college tuition and health care to worry about—expenses you can expect to further increase as you age.

Whether we like it or not, inflation is one thing that is constant, although no one knows for sure what exactly drives it to go up or down. Just don’t forget to make yourself aware of inflation trends and factor in some realistic expectations in your financial planning.

How Inflation Rate Affects Your Investments

Nobody wants to get stuck in a financial crisis. And as much as we want to live a happier life today, we also have to think about how we are going to get through a day in the future. So what is the best thing to do? Invest. Making a long-term investment, such as funding your retirement plan, is one of the best ways to grow your wealth. The aim of such investments is to essentially grow your money ahead of inflation so that you would have enough money to live on when you retire.

To save, invest, and gain more money in the future certainly sounds great. But like any form of trade comes inevitable risks. Despite the recent stats showing low inflation rates in the recent years, there is no assurance that low rates will continue in the near years to come. Nonetheless, inflation rate, as shown by history, has higher chances of rising over the next several decades than it is to fall, so making a choice to invest is definitely something you’d want to consider carefully.

The Importance of  Having Financial Goals

Money is a huge part of your life, but at the same time, your income can affected by so many factors that may not always be under your control. Speaking of things that are beyond your control, inflation rate is also one of them. While you’re held responsible for the results your own actions, learning how to manage your money allows you to be better prepared to face unexpected circumstances.

In addition, having a set of financial goals will most likely help you get through and adopt to ever-changing economic situations. With smart financial planning, you can increase the chances of achieving most, if not all, your financial goals and ultimately, financial freedom.

This Post Contributed by Cristina Beltran, a writer, blogger and online marketing specialist a Compare Hero, Malaysia’s leading online comparison portal. Tina is also a freelance writer, she worked as an information researcher before she pursued her writing career.

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This entry was posted on 03/06/2014 by in Finance and tagged , , .
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