Have you wondered how much you need to survive in 10 years? I ask the question as a way of asking how inflation will be like in real effect. We are interested in the purchasing power. Understanding purchasing power is important as it allows us to estimate how much we need to accumulate to retire comfortably.
Let's say we need the following in a month as a rough budget as of today:
- Food ($30 per day) costs $900 per month
- Rent costs $2500 per month
- Transport ($10 per day) costs $300 per month
- Medical and health costs $500 per month
- Entertainment ($150 per week) costs $600 per month
- Utilities costs $300 per month
- Misc. costs $500 per month
The total is $5,600 per month. Quite standard for a comfortable life in a developed society.
To calculate the amount I will need in 10 years per month, given a current need of $5,600 per month and an annual inflation rate of 5%, I can use the future value formula that accounts for inflation:
Future Value = 5600 X (1.05)^10
Let's calculate it.
In 10 years, given an annual inflation rate of 5%, I will need approximately $9,121.81 per month to have the same purchasing power as $5,600 today.
Looking at the figure, I am depressed already. But I shall come back another day to figure out how much is needed to retire in 10 years while maintaining the same purchasing power.
