Wealth Building Inflation: A Losing Combination |
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| By: Bettina Romberg | ||||
Inflation is the most pervasive of all economic uncertainties. It affects every part of our lives. But when we want to want to create a wealth building strategy that is when it affects us the most. Let's first take a look at what inflation actually means. Inflation is a rise in prices due to an increase in the money supply. An increase in the money supply occurs when the Federal Reserve prints more dollars, which when added to the currency in circulation dilutes the overall value of money. Prices rise because there is more money in circulation chasing fewer goods. Many economists agree that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. Inflation has averaged 4.22% over the last 30 years. If inflation continues at this rate, if you want to purchase something worth $10,000 today, in 30 years you will need over $32,400 to equal it. Here's another example of how inflation affects our livelihood: a $30,000 per year salary today will require a $97,300 per year salary in 30 years just to equal it. Remember, that is just to cover the quality of life one has with a $30,000 per year job today. One of the most obvious places one sees the effects of inflation is at the supermarket. It seems that the prices of goods there never go down. Even when a product is marked on sale, it seems that that "low" price was considered a high price just a few months before. There is a price measurement scale related to these changes, it is called the Consumer Price Index, or CPI. The CPI has been increasing by 118% since 1982. This means that prices have more than doubled in the last 30 years! How can anybody have a wealth building strategy when most of their paycheck goes onto the dinner table? Knowing that inflation is such a wealth building killer, many people put their savings into various vehicles in order to make it grow. Some people put it into a CD, a bond or money market account. Others buy real estate or stocks. All these wealth building strategies have seen losses from 51% to 8% over the course of the recession. The only investment vehicles that have seen gains are CD's and Money Market accounts. But they are losers too, because both these savings vehicles are making less than 4.22% per year, meaning that inflation will still affect your wealth building goals. It is a losing battle. A wealth building strategy that does not take inflation into account cannot be successful. |
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| Article Source: http://yourfinance.co.za | ||||
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