What does INFLATION really do to your money? Let's take a look...

You know how your Papi was always going on about, "in my day a house only cost $20,000, a coke was 5 cents, and I had to walk uphill both ways to school in a blizzard!" (Oh Papi, eat your meatloaf). Well, in the 1960's the median price of a home in the USA was roughly $20,000. Did everything just get more expensive? Well, yes and no. What happens over time is this thing called inflation, as you might guess, inflates (or increases) the price of goods and services due to a litany of forces.

Inflation is defined as the decline of purchasing power of a given currency over time. In other words, that buck just doesn't buy as much as it used to. The good news is that the median salary in 1965 was about $6,900 according to the U.S. Department of Commerce, and in 2021 it is roughly $51,000, so while things may cost more, average incomes have risen as well. The level of inflation and the rate at which it changes are difficult to predict, but the Federal Reserve, through different mechanisms, attempts to hold price increases at about 2% per year. Generally speaking, inflation hurts savers and helps borrowers over time. If you think you've been the smart one in the group by keeping all your money in the bank for 20 years, guess again. That $10,000 in 2000 may have bought you a quality car then, but now you might struggle to get a decent used model. Oh, and that raise of 3% you get every year isn't really a raise, it's just your employer allowing you to buy the same amount of groceries and gas you always have without dipping deeper into your pockets on a relative basis. Investing your money in stocks has proven to protect purchasing power over most periods of a decade or more, but consult a financial professional before you do. Or better yet, just ask Papi!

-Your Friends at Red Oak Financial Group