Inflation is part of economics, it is something that comes and goes, but when it hits, it hits really hard, hitting everyone regardless of status, but is usually felt most by the lower and middle class.
Inflation has to do with the rate at which the prices of goods and services rises, leading to lower purchasing power of the existing currency. Simply put during inflation, the prices of things just continues to increase and become expensive over time. The same amount of money tends to buy fewer goods overtime, for instance, if you could buy a basket full of groceries for $5, with inflation, that same $5 might only be able to buy half a basket or less.
Inflation can be caused by increased consumer demand, change in exchange rate or certain monetary policies etc
Impact of Inflation on personal finance.
Inflation does a great deal to our personal finance, it has major impacts on our finance as individuals.
Some of the effects of inflation on personal finance includes but are not limited to these:
Higher Cost of Living
As the prices of things increase, especially the basic commodities like food, clothing, shelter, healthcare, transportation etc, one is forced to use more of their income to purchase these things, hence leading to a higher cost of living on moderate to low income. This has become the situation for most individuals in my country as things that used to be mere commodities are almost becoming like luxury do the increase in the cost of living caused by inflation.This discourages saving as individuals barely have enough to live by, talk more of what to save.
Impact on Savings and Investments
How Inflation Shrinks Savings
Let’s say you have $100 in a savings account that pays a 1% interest rate. After a year, you will have $101 in your account. But if the rate of inflation is running at 2%, you would need $102 to have the same buying power that you started with.
This impact of inflation really hits hard, imagine that you have saved a huge amount of money over the years, and then inflation begins to set in, you just realize that the purchasing power of your money would have dropped drastically, and you begin to ask yourself what was the need to have saved, if after saving for the period of time you did, you are not able to use the money for anything useful, this is also the same for investments, but it depends on the nature of the investments. Inflation reduces the real value of investment returns.
To read more, you can check it out here
Increased Interest Rate and Borrowing
During inflation, central bank often increases the rate of interest, increasing the interest rates on loans is one of the ways to curtail inflation, but isn't the end solution, as it becomes difficult for individuals that need to borrow or those that have mortgage loans will just begin to see an increased interest on their mortgages.
Budgeting Issues
With inflation, one finds it difficult to budget for things, because of the rate at which the prices of things are increasing rapidly and unpredictably, hence budgeting becomes ineffective, as it does not meet up with the reason for which it is done. Individuals will need to adjust and readjust their budget always in order to accommodate the rising costs, which almost defeats the purpose of budgeting.
Source
In order to mitigate the effect or impact of inflation on personal finance, individuals would have to find a way to create multiple streams of income, so as to meet up with the ever increasing cost of commodities, investing in assets that outpace inflation is also a good way to minimize the effect of inflation, these assets can include real estate, certain dividend paying stocks, some precious metals etc.
I hope you enjoyed reading this and learned a thing or two.
This is my response to the #marchinleo prompt.
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