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The impact of inflation on your personal finances
The global economy has been on a slow recovery since the 2008-2009 recession, and with the outbreak of the COVID-19 pandemic, inflation has only gotten worse, and we can see prices go up again. Inflation affects our personal finances in many ways. This blog post will explore some of them.
Why is Inflation Important?
Inflation is the term used to describe a general rise in prices and a fall in purchasing power. Most people are familiar with inflation when they see it on their grocery store receipt but its impact on personal finances can be far-reaching.
Inflation can make budgeting more difficult. Even if you can save money, your savings may not go as far as they once did.
As inflation rises, interest rates also tend to increase, which means that the cost of borrowing money also goes up for many people. The end result is higher debt levels for individuals who have taken out loans or lines of credit during periods of high inflation to purchase goods or services.
Impact of Inflation
Lessens Your Purchasing Power
Inflation is a sneaky thing. It's been creeping up on us for decades and now has become a full-blown monster that affects not just the economy but our personal lives as well.
The average person spends around $2,000 per month, so, if inflation takes a bite out of your purchasing power by 10% over the course of a year, you'll have lost an extra $200 in purchasing power.
This may not sound like much at first glance but when you consider all the other unavoidable expenses we face every day, including rent, mortgage payments, and food costs, this can quickly add up to serious money down the drain.
Lessens Your Savings
Inflation is the rising cost of goods and services. In the United States, inflation has been running at about 5.3% in 2021. For example, when you buy a cup of coffee in 2022, it will be more expensive than now because of increased costs from the increased inflation rate. When you save money today, your savings have less purchasing power tomorrow because inflation will have eroded them over time.
How To Beat Inflation?
There is a common misconception that inflation is just an economic issue. In reality, it affects every aspect of your life. For example, if you consider buying a home or car, inflation will impact how much money you need to save for both the down payment and monthly payments. If you are saving up for retirement, inflation will decrease the purchasing power of the money in your account due to devalued currency value over time.
Even though there are many ways to protect against this issue, you should be aware that even these methods may not completely offset the effect of inflation.
Invest in Stocks
A lot of people are frustrated with the low interest rates on their savings. That's because inflation, which has been at or near zero for years now, is eating away at the value of your money. The solution? Dividends. Suppose you're willing to give up some growth potential in exchange for more stability and income. In that case, dividend stocks can be a great investment opportunity - especially when you consider that they have historically outperformed inflation.
Inflation is a powerful force in our lives and affects our personal finances and many other aspects of our lives. From the food we eat to the clothes we wear to how much money we have left at the end of each month, inflation has its fingerprints everywhere.
Understanding how inflation works and what it does can help you plan your financial future. If you're interested in exploring personal financial planning options against this phenomenon, then contact us today.