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Money Minute
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Inflation Explanation
Money Minute
Your savings rate should be higher than the rate of inflation if you’re going to make progress.

We’ve all heard the word inflation before, but do you actually know what it means and why it’s important?

Inflation is the rate of increase in the cost of goods and services. Inflation causes the purchasing power of money to decrease over time, which means in the future it will inevitably cost more to buy the things we need and enjoy today. For example, in 1985 a pair of brand new Nike Air Jordan 1s cost $65. In 2019, that same brand new pair of Nike Air Jordan 1s retails for $160. That is inflation at work.

If you’re someone who is many years away from retirement, you’ll want to seriously consider finding ways to counter inflation. Think about this, the typical savings account pays less than 1% in interest each year, which is significantly lower than that 1.81% rate of inflation. If you solely rely on a savings account paying less than 1% to save for retirement, your money will not outgrow inflation. The best way to overcome inflation is to contribute to your employer’s 401(k) plan, because in most cases your company’s 401(k) plan will offer you access to stock mutual funds, which is great because the stock market has historically tended to outperform inflation over time. Similarly, contributing to an IRA account invested in stocks or stock mutual funds can be also a good way, over the long term, to counter inflation.

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