Inflation is often watched by economists with a detailed eye due to the effects it can have on the economy. It is normal to have moderate inflation this is a sign of a growing economy however, if inflation gets out of control it can have an ugly effect on the value of the dollar and on your savings.
What is Inflation?
Inflation is when there are too little goods or services for the amount of demand on those goods or services. Simply put it is when a lot of people want too much of one thing. This allows for the merchant to raise the price because it is a highly desired product that is hard to get.
The biggest effect inflation has is it’s ability to rob you of your purchasing power by lessening the value of your money in the future. For instance, if there is a 4 percent a year inflation that means anything costing a dollar today will cost $1.04 in a year. Usually when you see the rate on inflation it is just an average number and does not necessarily mean everything will rise to that number. Some things will not rise as high and some will rise higher, whichever way keep in mind that the rate of inflation is normally given as an average and not a definite number.
It is important to consider the effects of inflation on the future value of your investment only if you are choosing between different time periods. If you are choosing between two different amounts but with the same time period the effects of inflation need not be considered.
The Dangers of Inflation
In most cases with the rise in prices there is a rise in salaries. However, there may be some companies who, due to the need to compete with other businesses, aren’t able to raise their prices therefore enabling them to raise the salaries of their employees. This in turn has a negative effect on those employees.
Another danger with inflation is for those who are invested in a fixed income product such as bank CD’s or bonds. With one of the solutions to inflation being higher interest rates those involved in a fixed rate investment will definitely lose out on the benefit of the prevailing interest rate.
What Does Inflation Mean To You?
Inflation can work for you or against you depending on your situation. If you are invested primarily in stocks for a lengthy period of time you could do fairly during the fluctuation of inflation. However, the negative effect comes into play if your money is heavily involved with bank CD’s or bonds with fixed interest rates. If you feel safer with your banks CD’s or bonds it is important to see if they offer special investments with inflation protection. If your bank doesn’t there may be other banks that do offer these services. Therefore, always remember to do your research before committing to an investment.
Whenever picking and choosing your investments and determining their present and future value it would be wise to always consider inflation and the effect it will have on your investment.
Photo by: ZeroOne
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March 19th, 2009 at 9:58 pm
[...] Random Feed wrote an interesting post today onHere’s a quick excerptInflation is often watched by economists with a detailed eye due to the effects it can have on the economy. It is normal to have moderate inflation this is a sign of a growing economy however, if inflation gets out of control it can have an ugly effect on the value of the dollar and on your savings. What is Inflation? Inflation is when there are too little goods or services for the amount of demand on those goods or services. Simply put it is when a lot of people want too much of one thi [...]
March 21st, 2009 at 2:17 am
What’s The Property Financing?
Property investment is a term that most people are familiar with. People usually invest money when they have a surplus or when they are planning for the future. The very careful ones opt for government securities and the adventurous ones go for stock markets. Where does the property investment stand on this line between the secure and the risky?
If anybody is thinking long term then property has no parallel as it has been seen that in a larger time frame land never betrays. Property can be used to get rental income or can be used to secure a loan for any business venture alongside the property. Property investment also requires detailed research before the deal is drawn. Bear in mind that if the property is upon a disputed land then there are risks of recurring loss. On the other hand, if the property is situated at a location where many facilities are accessible then the prices will appreciate significantly over time. Any kind of Property Investment has been and shall always be one of the best kinds of solid investment opportunities.
March 22nd, 2009 at 12:07 pm
[...] presents The Effects of Inflation on Your Money posted at Personal Finance [...]
March 29th, 2009 at 7:25 pm
I’ve been thinking about the possibility of high inflation lately. Traditionally, periods of high inflation are a great time to be a borrower because you are purchasing in today’s dollars yet paying in tomorrow’s dollars. This goes against my basic saving stance and makes it difficult to know how to plan for the future.
Thanks for adding to my knowledge.
May 4th, 2009 at 1:06 pm
[...] presents The Effects of Inflation on Your Money posted at Personal Finance Ology, saying, “Inflation hawks are on the look out. Learn why and [...]
July 6th, 2009 at 4:13 am
i really think that inflation some of African people so poor in that some can’t afford some essential products such as food’soap, power and many others.
January 4th, 2010 at 1:22 pm
You are right, people should listen to what you are saying because are absolutely right.