The Joys of Inflation

Posted By: Dr. Frugal in Saving on 08/28/2007 at 15:25:41

Inflation is the effect of rising prices on your purchasing power. When calculating how much money you will need in the future, you absolutely need to plan for fiscal inflation. Otherwise, it will take huge chunks out of your spending plans. The annual inflation rate since 1992 has been about 2.5% but, if you can remember back that far, in the 80's we were experiencing double-digit inflation annually. Since we do so much of our financial planning for years down the road we need to consider inflation when determining how much money we need to have in the future. We can use the Rule of 72 when talking about inflation: if the inflation rate is 4%, prices will double in just under 20 years so if you're planning on retiring in about 20 years, you will need to have twice the amount of living expenses you have now to retain the same amount of buying power. Scary, huh·

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