You have probably heard that inflation affects you in some way, but it generally feels like background noise. Inflation creeps upward gradually, almost unnoticeable.
“I remember when a dozen eggs were a nickel,” or “I remember filling my car’s tank for $10,” are the type of comment you might hear to remind you that inflation is real. If you are young enough, these comments seem almost fictional and might not draw your attention.
We rarely stop to look at inflation specifically and it seems less important to focus on. Taking a concrete example helps drive the point home, however. In the graphic below we took the simple example of stamps – how much it cost to send a first class letter in the United States. We tracked the price of a first class stamp over the last 130 years, noting the changes, to show the steady erosion in buying power during that time.
Inflation is one of the reasons we advocate investing in the markets so strongly. A company’s value will do better at keeping up (or hopefully exceeding) with buying power, and buying pieces of many companies around the world will give you an even better chance of your money keeping up.
Putting money in a checking account means you will have the same number of dollars, not fluctuating with the markets, but over time those dollars will buy you fewer things.
Inflation may be an abstract concept, but looking at real examples of the decline in buying power of $1 helps reinforce that saving and investing should be a financial priority.
Stamps Photo used under Flickr Creative Commons license.