5 Ways that Inflation Affects Your Personal Finances
August 14, 2008 by Miranda Marquit
Filed under Finance
Right now, the big news is that inflation is at its highest levels in 17 years. There are a couple of ways to look at inflation:
- As a rise in prices.
- As a decline in the value of your money.
Either way, inflation has a very real effect on your personal finances. And it’s not just “regular folks” feeling the pinch. Millionaires are feeling the pains of inflation as well.
Here are 5 ways that inflation can affect you:
- Cost increases. This is the most obvious way that inflation can affect your personal finances. Your food, energy and other products increase in price. Additionally, you will find that loans often cost more, as inflation causes interest rates to rise.
- Investment returns. From your retirement account to your savings account to your online brokerage stock portfolio, inflation can knock your investment returns. Your returns are lower in times of inflation, as companies grow slower — and can even go negative. Additionally, inflation erodes your return rate on your investments.
- Cost cutting by companies. As inflation cuts into company profits, you will find that there are efforts to stem the outflow. This means that some benefits and perks may be left out. And, in this sort of an economy, it is no surprise when downsizing becomes a regular part of the job picture. You might lose your job.
- Infrastructure development. The roads you drive on and the grid that carries your electricity are all results of infrastructure development. As costs go up, governments slow their projects. This can affect you in terms of car maintenance, time spent going somewhere, the efficiency at which you receive power and any number of services we have come to expect from the government.
- Higher taxes. Inflation tends to lead to higher taxes. Money to pay for all the things we expect has to come from somewhere. And as those bills get bigger, so does the tax bill for individuals.
Can you think of any other effects of inflation?
I can’t think of anything off my head, but then again I just tend to avoid thinking about the whole concept in general ;) I like to live in my positive bubble every now and then, regardless of whether it’s pretty stupid or not. haha…good post though!
LOL. Thanks for the comment :) Living in your own bubble can be nice, especially if you have been living so that you can absorb some of these cost increases.
Inflation leads to a general higher cost of living. That leads to an increase in minimum wage. The increase in minimum wage leads to an increase in the cost of goods and services. This contributes to inflation…. there was an old lady who swallowed a fly.
Great assessment! It is rather circular, isn’t it?