Today’s topic is Inflation and how does it affect your financial goals. Inflation is represented by the Consumer Price Index (CPI) which measures current and past prices of a sample “market basket” of goods from several categories such as housing, food, transportation and clothing and other discretionary and non-discretionary goods.
Inflation (rising prices) affects the cost of living, cost of doing business, borrowing money, mortgages, health care costs, etc. Inflation makes a $1 next year worth less than a $1 today because the $1 will buy less goods a year from now. If annual inflation is 2%, then $1 today is worth $.98 a year from now. This is a characterization of all fiat currencies (one that isn’t backed by anything other than the full faith and credit of the underlying government).
So how can inflation be any good for anyone? It depends. To me, inflation can be your friend. Think of your parents or grandparents first home. Inflation also affects your investment portfolio and inflation must be considered when determining how much you need to retire comfortably:
1. Stocks have historically performed better than other assets and more likely to outpace inflation.
2. Bond prices will fall when inflation rises because of the reduced purchasing power of future interest coupons.
3. Commodity prices (oil, gold) tend to rise with inflation.
4. Real estate tends to keep up with inflation.
5. Borrowers using adjustable rate mortgage will pay higher mortgage payments if interest rates rise.
Of course this is an important topic for you and it requires more than a one minute video and a website. For more financial insight, go to www.SamalinGroup.com/blog, enter your info and let’s stay in touch. Thanks for watching.