Inflation in the Economy
Inflation is something that many people have heard about; however, few people think about its effect on their money. Every year, inflation is present in the economy in one way or another. Whether that be at the usual 1.88% as seen from the years 2012-2021 (Forbes.com), or the astonishing 7.4% last December (Forbes.com), it is part of one’s everyday life and is here to stay.
What Causes Inflation?
There are many things that can stimulate and cause inflation within the economy. The primary cause is when there is a high demand for something, but not enough supply of that thing to keep consumers happy. For example, if there is a high demand for beef, but little supply of it, this will subsequently inflate the price of beef as it becomes something that consumers highly desire. The same principles apply to the economy as a whole; high demand with little supply is usually a result of the government spending a lot of money, printing money, setting a low-interest rate, and enforcing indirect taxes on businesses. Also, it can be a result of the population growing, valuable resources being hoarded, a shortage in production of some essential resource, a failure in importing/exporting products into/out of the country and trade unions that demand an increase in the wage of workers.
The Dangers of Inflation
Even though inflation hovering at 1.88% might not seem significant, its effects can be devastating. Say, for example, you have $100. That very same year, $1.88 from your $100 will lose value, and essentially, become worthless. Another example is if you have $100,000 saved up. With this amount of money, you will lose $1,880 the first year, and from there on out, your $98,120 will continue to decrease until it loses most of its value.
Investing in the Solution
One of the easiest ways to combat inflation, without needing to replenish the lost money constantly, is to invest in the stock market. In specific, to invest in an index fund called the S&P 500. On average, this index fund has brought in 10% of profits annually over the past 30 years (fool.com). This means that not only does it beat inflation, but it does so by 8.22%. Also, through investing in the S&P 500, not only do you save money from becoming worthless, but you can also earn massive amounts of it from compounding interest.
The Beauty Behind Compound Interest
The beauty behind compound interest is the fact that you can turn small lumps of money into hundreds of thousands of dollars over time. This works because as time progresses, you receive interest on the money you have earned and on the interest you have accumulated from years past. For example, if you invest $100,000 into the S&P 500 and leave it at that (looking at 10% profits annually), after 30 years, you will end up with $1,744,940. On the other hand, if you invest $550 per month into the S&P 500 (once again, looking at 10% profits annually), after 30 years, you will end up with a little over $1,000,000.
Summary
Overall, one of the best and easiest ways to deal with inflation is through investing in stocks. It doesn’t necessarily have to be the S&P 500; however, through investing in this index fund, you are guaranteeing yourself a constant cash flow, a profit near that of 10% per year (if the U.S. economy continues to be strong), and making it easier to retire in the future. The worst decision you can make, though, is to let inflation take control of your life, burning cash in front of your eyes whilst you sit there and do nothing. Take control of your financial future by beginning to invest as soon as possible, even if it’s only $5 per month.
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