Inflation

You’ve probably noticed that the price of sneakers, gas, and fast food seems to rise every year. That is because of inflation.

Inflation is the rate at which the overall level of prices for goods and services increases over time. Inflation not only raises prices but also makes money less valuable. Each dollar in your wallet gradually buys fewer goods and services than it did before.

Think of a dollar bill as something whose value can degrade, somewhat like a battery. Over time, a battery slowly loses its capacity and power. The same thing happens to the dollar when there is inflation.

In the 60s, $20 could buy enough groceries to feed a small household for a whole week. Today, that same $20 buys much less. The dollar may look the same in appearance, but its ability to buy goods has declined.

The term “purchasing power” refers to what your money can buy. Over time, inflation reduces this power. It may feel safe to keep money in cash, but that comes with a hidden cost. If inflation averages 3% per year, cash that earns nothing loses 3% of its buying power every year.

To preserve its value, money must be invested in ways that grow at least as fast as the rate of inflation.