If you watch the news, you have most certainly heard the term inflation thrown around every so often. While you understand the basic concept of inflation, the rise of prices over time, you may still be left wondering how inflation impacts your wallet.
So today, I am going to show you just this. The goal is to help you see exactly how inflation, whether it is rising or falling, impacts your finances on an everyday basis.
By understanding this, you can make better financial decisions to get ahead.
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5 Common Ways Inflation Impacts Your Wallet
#1. Increased Cost Of Goods
Since the basic definition of inflation is the rising of prices over time, the increased cost of goods should not come as a surprise. As inflation grows, the cost of everything you buy increases too. But you have to understand that even if inflation holds steady, prices are still increasing.
Over the long term, inflation has averaged 3% annually. This means that for every dollar something costs, the next year the price will be $0.03 more. And then another 3% the following year, and so on.
For example, let’s say the price of a gallon of milk is $4 today. Assuming inflation is 3%, next year the price of milk will be $4.12. The year after that, milk will be 3% higher again.
This is true of all goods you buy. As inflation increases, the prices you pay will increase. This is another reason why having one dollar today is more valuable than having one dollar tomorrow.
#2. Increased Savings Account Rates
While it’s painful to read that the cost of everything goes up thanks to inflation, you can also benefit from its rise as well. This is done through the interest you earn on your savings accounts.
As inflation rises, the Federal Reserve works to control it by raising or lowering interest rates. By changing interest rates, the Fed is able to keep inflation in check. We can be certain it won’t rise too quickly or drop too fast.
