Along with death and taxes, you can count on inflation to lie in waiting for you.
What is inflation? It’s a $40.00 fill-up. It’s the $4.00 loaf of bread, the $1,200.00 rent payment, the $150,00 electric bill, and the $12.00 movie ticket. And it never stops.
The world goes through periods of high inflation and low inflation depending on a lot of factors but even with a low rate, inflation still finds us. The wise earner, saver, and investor acknowledges inflation and tries to adjust.
That adjustment may be nothing more than heightened awareness: “With all this government spending, I’d better pay more attention to the inflation rate.” It may take the form of preparation: “Okay, so what am I going to do if inflation starts climbing?” Or it may take the form of action: “Uh oh—if I want to retire in 20 years I’d better max out my 401(k) contribution.”
The main thing is, inflation is so sneaky and easy to forget about that we need something to snap us back into reality while there is still time to do something (say, adjust our spending and saving habits).
That’s where the inflation calculator comes in. With this tool, located on buyupside.com, you can see what today’s money will be worth in a certain number of years. After entering an amount in today’s dollars, you forecast the average inflation rate* and number of years, then click Calculate to see the Reduced Amount and Required Amount.
Reduced Amount means the value of today’s dollars in the number of years you specify. Required Amount means the amount of money you will need in (in X number of years) to match the purchasing power of today’s dollars.
The best way to understand this is with an example, as shown below. If you have $60,000 in 2010 and the average inflation rate over the next 20 years is 3 percent, how much will it be worth in 2030? Just more than half. Ouch.
How much will you need in 2030 to purchase the same goods you can buy today for $60,000? A whopping $108,000.
“Yes well,” you may be thinking, “2030 is soooo far away why should I think about it now?” As I said, inflation is the silent stalker and whether you like it or not (i.e., whether you’re prepared or not) a 2030 loaf of bread will be $8.50 and a middle-class home will set you back $1.3 million. Bigger ouch.
The inflation calculator can be found here at buyupside.com.
* There are a great many sources for this. While nobody has a crystal ball, you will get a broad range to use in the WHAT-IF game.
