The impact of inflation on money is real. I often talk to people about investing and realize that they are interested in the topic but they don’t really understand why they should invest. Therefore, in this article, I will show you the main reason why many started investing right away.
Let’s start with the main question: Why should I consider investing?
If you keep your money in a bank, under a mattress, in a pillow, or in some other tempting place, its value is lost every day. Therefore, time doesn’t work in our favor and we need to devote time to investing. In this case, time actually works against you. That sounds bad, I know, however, I need to get your attention in order to accomplish something here.
The inflation rate is actually the percentage difference between the historical price and the current price. Usually, governments strive for a 2% to 3% inflation rate. Low inflation rates (around 2%) are good for the economy because they incentivize consumer behavior, enabling people to buy more goods and services at low prices. In short, governments want us to spend our money immediately in order to stimulate the economy. However, we can save that money and invest it.
Inflation around 2-3% a year doesn’t seem like much, but let’s see the effect over several years. For this reason, I created a simple Inflation Calculator by which I will demonstrate to you how important is it to start investing ASAP. So let’s take a look:
Calculate the Impact of Inflation[CP_CALCULATED_FIELDS id=”6″ ]
Imagine you saved 100,000 euros in 2000. That’s a nice sum, right? If you kept that money in cash at your bank or home, guess how much money would you have after 20 years with average annual inflation of 3%? Look at the predefined values in the calculator. Yes, the inflation would have eaten up 45,6% of your portfolio. And no, you would not have so much less money in cash, but for the same 100,000 euros, you could buy so much fewer goods and services.
For example, a property in the year 2000 costs 100,000 euros and you can buy it with the money you have saved. However, if you wait 20 years, there will be a general increase in prices. Therefore, the property will be worth in this particular case approximately 180 thousand euros.
I challenge you to find inflation rates for your country. You can look for information on Statista or from Trading Economics. Of course, you can look elsewhere to find information. After that, put the average inflation rate from 2000 to 2020 in the calculator provided above to see how much money would inflation eat up in your country. I know, it might be ugly, but it will motivate you to make better financial decisions in the future.
The Impact of Inflation on Wages
To compare the impact of inflation on wages over the years, I will take as an example Germany which had the following inflation rates from 2008 to 2018. In addition, you can see that the total inflation is 12.2% in that period.
|Year||Inflation Rate (%)|
If you look at the average annual salary in Germany, you can see it was 37,236 euros in 2008, while in 2018 it was 45,560 euros. This is an increase of 25% (a pretty nice increase). If you look at the fact that inflation in that period was 12.2%, the real increase in wages is only 13.8%.
|Year||Average annual salary|
What we realized from this post is that it is by no means good to leave money under the mattress for an extended period of time, so I hope I have encouraged you at least a little to think about what you will do with the money earned.
Now that you got the impression of how important inflation is in determining the value of our money, it’s time to figure out how you can beat it and what exactly to do. In the following post, which is about saving the value of money, we will cover how we can use time in our favor.