Money 101: What is Inflation?

What if I told you that the most common way to lose your money is to do absolutely NOTHING???

That's right.

If you have $100 to your name, and did nothing but put it under your mattress for the entire year, you would actually have $98.24 at the end of the year.

That is because of the "Ghost Tax": Inflation.

Inflation is defined as:

"Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.”

~ Sam Ewing

"The decline of purchasing power of a given currency over time"

In order to understand Inflation, you have to be familiar with the concept of the Time Value of Money.

According to this principle, a sum of money is worth more in the present than that same amount in the future. A great way to see this in action is to use the Inflation Calculator to see find the purchasing value of $100 when you were born as oppose to today.

Inflation is basically the decay in the purchasing power of money over time. It occurs in minute increments over time, but these small decreases add up over time.

How Is Inflation Calculated

The U.S. Bureau of Labor Statistics uses the Consumer Price Index to track the price of over 80,000 consumer items on a monthly basis.

The difference in the prices of these items over time is measured as the inflation rate.

In 2019, the inflation rate was 2.3%.

And, as with almost everything money related, it compounds.

So 2019's 2.3% inflation rate is on top of 2018's rate of 1.8% and 2017's rate of 2.1%.

Understanding the effects of inflation on your money is important when it comes to researching ways to not only protect the value of your money, but to also grow your money.

Remember that money is simply a tool. If you use it properly, it can provide resources for you that will help to enrich your life.

Squandered or allocated improperly, and you will always find yourself lacking and chasing.

Learning basic personal finance strategies for building and protecting your wealth will go a long way to ensuring that your money works for you at some point, rather than you always working for your money.