“Inflation”, “deflation”, “stagnation”; they’re words that seemed to be tossed around by economists and the main stream media with regularity. We hear about the government reported numbers on inflation. We listen to financial experts express their concerns about inflation eating into our savings and incomes. We hear about the Federal Reserve’s concerns regarding potential deflation.
However, maybe most importantly, understanding the personal rates of inflation in our everyday as well as long-term spending can be critical to more successfully managing our finances. This is why I track all our expenses throughout the year, year-over-year, which allows me to review changes in product and service pricing and develop a personal inflation rate.
Like snowflakes, we’re all slightly different
While as consumers most of us might be similar in our purchases – needing food, clothing, shelter, etc. – we are also likely different in some ways when it comes to how we spend, in what amounts, and upon what.
According to fivethirtyeight.com, “We tend to talk about inflation as a single number affecting the whole economy. But everyone experiences a slightly different rate of inflation for the simple reason that we all spend money on different things. The price of cigarettes matters primarily to smokers; the price of diapers affects mostly parents of young children; and the price of gas is a much bigger deal to someone with an 80-mile daily commute than to someone who only takes the car out for weekend excursions.”
This means that while the government might report one inflation number, the number that affects my household and the one that affects yours could be drastically different.
Determining better ways to spend
Better understanding your personal rate of inflation can be a huge help with near-term financial planning. Due to having to track you expenses over time in order to develop this inflation rate, you can see how you spend, where, and in what amounts. This can help reduce expenses in areas where you might not even realize how much you are spending or help you make decisions that could make your spending more efficient.
Having a personal inflation rate can be integral to long-term financial planning as well, especially when it comes to retirement. Knowing how much your expenses are currently, and how much they generally increase each year, can make it easier to forecast how these expenses will inflate moving forward. This means that you can take current numbers, projecting forward up to and maybe even into retirement to determine things like retirement costs, how much income you will need to cover such costs, as well as where you may be able to reduce expenses.
And it’s due to these factors that understanding personal inflation can be an integral part to your current and future financial planning.
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The author is not a licensed financial professional. This article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.