Why Inflation is Bad - The Silent Thief

You will be robbed by a criminal this year.  Yet there is no police to call, no barrier to put up, no escaping this fate.  There is only concession, inevitable surrender to his presence and the willingness to endure.  We know this crook by his work – the rising cost of bread, reminiscence of $ 1 gas, and memories of an affordable night at the movies.  His name is Inflation, and he is the silent thief who continues to steal your riches year after year.

Statistics have shown that over the last 50 years the average inflation rate in America has bounced between 4-5% annually.  “Chump change!” you say.  Well slow down, Mr. or Mrs. Irrationality and let’s take a minute to think about this.  The compounding effect of year-over-year devaluation of your money can add up to be a good chunk of change.

If one was to ask: ‘Do you remember the day the Twin Towers fell?’  There would be few people who could forget the day, let alone consider it to be some far off time.  After all… it seems like it was only yesterday when we think about it, right?  Let’s use this timeframe of late 2001 when the world momentarily stopped for our example.  During this between-time if we were to use a 5% annual inflation rate, a person who had a steady salary of $ 35,000 would roughly need a $ 50,000 income stream today in order to keep the same level of income.  This is merely based on the fact that the cost of living over these last seven years would have risen 41%.

It is this simple 4-5% annual depreciation of your money’s worth that presents a difficult challenge when it comes to truly saving for your financial future.  Like swimming against an outgoing tide, only an adequate savings rate that can counter the effects of inflation can actually be considered a means of saving money.

After all, banks are the bad joke that most people fail to realize.  An average savings account would be considered generous to give 0.5% annual interest.  Even a direct online savings account falls short with an average 3-4% annual return to the customer.  There is something disappointing about the notion a person is actually saving money in a bank.

In the end, while we all need banks to hold onto a portion of our savings for the purpose of liquidity (having cash available), true saving capability ultimately begins in a place few young people dare to venture – the stock market.  With an average return of 8% annually, some of the most common trend indicators have historically shown the capital markets to be the most logical place for a person to beat inflation.