Does Inflation Affect Me Personally
It’s easy to conclude that inflation is having an impact on us, but few of us understand why (or even want to take the time to understand), so it seems difficult to really know if we are going to have enough. Though we don’t understand the complexities of the economy, we trust it for some reason.
In our personal finances, we don’t pay much attention to how inflation is having an impact, but it absolutely is. If we are being honest, most all of us would admit that we suspect inflation is affecting us, but we don’t understand it and cannot explain exactly why it is impacting us. With some level of understanding, each of us need to be able to answer the question, “Does inflation affect me personally?”
To gain an understanding and be able to answer that question, we need to look at some numbers, which is almost painful for me; I hate numbers! What I have discovered is that while numbers can be used to place a value on some things and verify others, in a lot of ways they are frequently manipulated to say whatever people want them to say. We could look exhaustively at reams full of numbers and still not be able to answer the question, “Does inflation affect me personally?”
So, what is Inflation? In the world of economics, Oxford Dictionary defines it as, “A general increase in prices and fall in the purchasing value of money.”
Look at inflation as loss; it reduces the real value of money over time. It’s strange, but we hear so much about the market and interest rates and this, that, and the other thing... blah, blah, blah… but at the end of the day I know my money has lost value. How much more earned income is required to purchase the things I used to purchase for far less? As we discussed in a previous article titled How to Beat Inflation, while income has remained relatively flat since 1978, common things that we use every day have skyrocketed in cost. In that period of time, pickup trucks have increased fourteen-fold!
When I was in college, I took a mathematics class that was made up by the two professors. How do you make up math? They had developed symbols and formulas for their own created math, and I honestly felt ripped off by it because it was a required math class. They had written their own textbook that I was forced to purchase (of course), but that class was stunningly senseless. It did nothing in preparing me for life, for my upper level courses, or for understanding simple things like inflation and deflation. All it did was put money in the pockets of two professors who made numbers say whatever they wanted. A lot of the absurdity we read in the news related to our economy reminds me of that math class.
For example, the experts in retirement planning typically say that retirees should plan on 3% for annual inflation. This 3% idea is based on questionable data manipulation though. Even if it were true that inflation averages 3%, which it does not, your Social Security Cost of Living Adjustment (COLA) sure isn’t going to keep up. According to the Social Security Administration, 2016 saw only a 0.3% Cost of Living increase.
In fact, the average for the last 20 years is only 2.125%, so if your retirement plan is based on an increase in inflation of 3% but your income only goes up 2.125%, you are going backwards at a time that you want to at least stay the same. But that is just an example; true inflationary numbers are much higher than only 3%. You may be beginning now to admit that you really have a suspicion about how to answer to the question, does inflation affect me personally?
If inflation is having a direct impact on us, what can we do to compensate for it, especially when you aren’t making at least an additional 3% annually, consistently? Savings account deposits sure aren’t going to cover that when they are paying so little interest on deposits. For the first time in human history, we literally have “negative” interest. What? How do you even define that?
To be accurate, understand that true inflation numbers are running at a much higher number than a simple 3%. If you still question that and are wondering if inflation is hurting you, go to the inflation calculator of your choice online, type in your wage (or any wage) in 1980, and see what it says you would have to make today, just to stay even. If money has lost significant value in the last 40 years, isn’t it reasonable to think that unless some dramatic change takes place, then similar (or worse) results will happen over the next 40 years?
Here is an example, where I put a $50,000 salary in 1978 into an inflation calculator (see the image and link below). This Inflation Calculator is put out by the U.S. Bureau of Labor Statistics (a government agency) and shows that you would have to be making $194,271.20 to be maintaining the same buying power and standard of living today, entirely due to inflation. If you are not increasing your income by at least that much, then inflation is taking you backwards and your finances are shrinking.
The Federal government of the US is just under [$20 Trillion] in debt at the time of this writing, and has promised approximately $200 trillion in pension and medical benefits. Unfortunately, all of it is unfunded! The truth is, none of us can even comprehend how much and how big a trillion dollars is! Numbers like that are just numbers that have no tangible expression or meaning to us. Should we understand them? I sure think so. Will this have any effect on us personally? Absolutely it will, even if only through inflation.
Consider what $1 Trillion is. If you counted one dollar every second, it would take:
- 2 Weeks to count to $1 Million
- 50 Years to count to $1 Billion
- 31,000 Years to count to $1 Trillion
We have $1trillion adding to our Federal debt every year. How does that money get paid back, and how long would it take? Numbers that large are just too large to comprehend, and too often we don’t feel like there is anything we can do about it anyway; we just hope things are better when we get to retirement. That is NOT going to happen. Our country living on CREDIT (debt) absolutely results in inflation, and that unquestionably affects you and me!
The US government currently needs over $400 billion (taken from taxpayers) just to pay the interest on its debt. If the government tried to pay that debt off by paying $10 million a day, 365 days a year, it would take approximately 5,000 years. That also means that, at the same time, all of the debt we are currently taking on would have to immediately stop. Where would they get the money to do that since all of this is happening while you and I are having an increasingly difficult time making ends meet. How will the government come up with that kind of money while we are trying to prepare for retirement? Clearly, it isn’t going to happen. Like the wrapper said from the Dove Chocolate® I recently ate, “Take off your rose-colored glasses.” We must actually DO something to overcome what inflation is doing to us.
Does inflation affect me personally? Absolutely! Can I do anything about it? Yes! However, the only thing you can do that will have an impact and make a difference to you personally is add to your income. If you think that reducing your expenses will help, you will find yourself worn out trying to reduce enough to make a difference, and you eventually will not be able to keep up. Besides, you cannot reduce enough individually to make any impact at all on the federal debt we live under.
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Until next time,
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