Inflation is often an overlooked "ravaging element" of a financial portfolio by a consumer. In a physical home one puts a "roof" over their house to protect their belongings inside the house from the elements of sun, wind, hail and/or rain.
Your financial house's "roof" has a very similar purpose yet your belongings are your financial goals i.e. "emergency funds", "retirement strategies", "investments" or other "opportunity" dreams. Overlooking this is very unfortunate because the necessity of this "roof" existing is imperative to ones entire strategy and KNOWING this can mean the difference between your dollars not only surviving but also lasting throughout your life and your heirs lives as well. At MSA we call that being "proactive" vs. "reactive."
Inflation makes a huge difference in what our dollars will stretch to at retirement and can be understood in the same way that we understand compounding interest returns on our investments or inflation on the cost of goods.
For example: in 1960 we could buy a house for $20,000. In 2010 the "average" family home cost an American family $150,000. That means that the cost of a home has inflated at a rate of 13% a year. ($20,000 x 13% - $2,600 a year x 50 years = $130,000 plus the original cost of $20,000 - today's cost of $150,000).
Our government tells us that the current national inflation table is 3.1% right now. What that means is your overall income needs to grow at least 3.10% a year for you to continue to live the same lifestyle you live today. The REALITY CHECK is that so do your RETIREMENT DOLLARS. If your income is not growing and/or your retirement dollars are not growing at least this 3.10% factor then you are going backward financially. What that means is EVERY YEAR you don't have the increase then you should cut back in your lifestyle to address the lack of increase. So if you were making $20,000 in 1960 you would have had to grow your income to $51,000 this year to have maintained the same life style that you were living in 1960. If we used this analogy looking at history and you increased your lifestyle since then yet are only making $51,000 today then you most likely have DEBT to have accomplished this.
That basically says to your financial portfolio that you are "captive" to debt now and are living beyond your means. It also says that you need to create a FIRM BUDGET and look at your whole portfolio ASAP to see where adjustments can be made. Otherwise you are setting yourself up for failure.
We all have to understand that with every dollar of "income" we Americans make, we have an UNCLE who gets his portion and that is called "income tax" and INFLATION is going to happen as well, so we must pay very close attention to the "roof" of our financial house and prepare accordingly.
To research these items visit: www.bls.gov (for the national price index)
You may also want to Google the "national inflation table" and the averages will be mind boggeling. For example, the national price index will tell you that the 2010 inflation table is 2.1% yet the last 10 year average is well over 3.1%. There is much for us to pay attention to where our money is concerned and where the american dollars value is concerned as well.
For more information on this element of INFLATION to your financial house's "roof" please contact our office for a FREE financial consultation.