This post will try to follow a very simple explanation of inflation and how it impacts you. I will try my best to explain it in a ELI5 (Explain Like I’m 5) format.
What is Inflation?
Inflation is the decline of buying power your money has. Buying power is referred to as purchasing power and this simply means that the exact same product or service will require more dollars in the future.
Here is a quick example looking at the price of coffee and milk. The graph below represents how much the average cost for a cup of coffee and a gallon of milk have changed since 1970.
US Inflation Calculator is a cool tool to see how inflation has changed. The chart below shows how inflation has changed over the past 10 years (2010-2020).
This means that if your rent was $1,000/mo, it is now $1,187/mo simply due to inflation. The issue is magnified when you look at your expenses across the board: healthcare, food, insurance, etc.
You need to maintain your purchasing power. And this is why we invest!
I know some people are afraid of investing and only save money but saving is not enough. Only saving deteriorates your purchasing power. Pre-pandemic, the best high yield savings accounts were around 2.25%. If you were in a traditional savings account it was around 0.10%. Below lists US inflation year by year from 2015-2019.
Data by US Inflation Calculator
Traditional savings do not do any justice in maintaining your purchasing power while a high yield savings account (prior to COVID) was keeping up with/outpacing the rate of inflation. Also, those jobs that give 2-3% raises are just keeping up with inflation, it doesn’t give you any more purchasing power than you had before. Inflation really matters especially when you are looking at retirement and lose your primary source of income and trying to maintain your lifestyle.
TLDR: Saving is not enough, you need to invest your money to keep up with inflation and maintain (or even grow) your purchasing power.