Death, taxes, and oh, one more…inflation. Those are all guaranteed. Well, there have been a few years, (the last year was 1954), where we had deflation but for the most part, ever increasing costs for goods and services have been a guaranteed part of the American experience.We don’t think too much about inflation because it appears as a few cents here and there and it’s expected. Just because we don’t think much about it, however, doesn’t mean it’s without cost. For someone born in 1960, inflation has averaged 3.7% per year since you were born. At that rate, inflation has decreased your purchasing power by half every 19 years or so.
Are You Becoming Poorer?
Any way you cut it, money is purchasing power
. If your money doesn’t purchase as much today as it did last year, you have become poorer – plain and simple. This reduction in purchasing power is the core reason for investing in the first place.Here’s a simple juxtaposition to consider. Since 1926, U.S. inflation has increased by 3.1% per year. During the same timeframe, the S&P 500 increased by 10% per year. The difference of the return above inflation is how you pay for inflation
. Does this mean these numbers are what to expect in the future? Perhaps not, but you have to be willing to accept some risk by investing in stocks in order to quash the much larger, more pervasive risk of inflation. For fun, I have listed below a handful of items with their prices 20 years ago compared to today to illustrate the destructive power of inflation.
A Wasting Asset
Living cost increases (inflation/purchasing power decreases), demand payment and cannot be deferred
until a later date. The due date is now. So, our only choice is either to figure out a reliable way to pay this cost or accept an ever-decreasing lifestyle. The purchasing power chart above demonstrates how difficult it can be to steer your way clear of inflation. Almost everything you buy costs more with every passing year.Many investors think they can freeze their assets in place as they are and hold tight without any change in purchasing power. This is an entirely erroneous perspective that starts with the false assumption that currency is money when actually purchasing power is money. As the chart above reflects, currency is a declining or wasting asset over time.Every single year since 1954 your money has lost purchasing power. A critical part of maintaining financial wellness is following a reliable strategy to confront this silent yet destructive force. Start there.Related: Are You Anywhere Near Retiring on Your Terms?