Why Does Inflation Cause You To Loose Money

Often people are confused by inflation and why it causes us to loose money, in this post hope to clear that up.

So what is inflation?
Inflation tells us how much prices are going up. This means if inflation is currently at 3% then something that costs $100 at the moment would cost $103 in a years time. Usually people get roughtly inflation rate wage rises so usually you don't notice the prices going up much.

How can it cause you to loose money?
If you have a saving account with $100 in it you are getting 2% (after paying tax on the interest) then in a years time you will have $102.

While right now you could buy the $100 item in a years time the item will cost $103 but you will only have $102. Effectively you have lost $1 for by waiting to buy the item.

What is happening the interest on your $100 is not enough to keep up with rising prices so year on year you are able to by less and less with it. Effectively you are loosing money.

This is why it is very important to try and make sure any long term savings you have have an interest rate that is larger than the rate of inflation. Of course this is not always possible but you should try.

If interest rates are low sometimes it is prudent to pay off part of your mortgage as this is often charged at a higher rate of interest than you can get in a savings account. Remember to always keep a little pot of cash to tide you through bad times such as loosing your job or some other disaster.