The Devil’s Name Is: INFLATION

In my past few articles (123), I have been going over savings strategies that will fundamentally change your life if you follow them:

  1. Save before spending
  2. Automatically contribute to your savings
  3. Don’t spend your savings unless for emergencies
  4. Save as much as possible
  5. Move your savings to a high-yield interest rate

The problem is that most of you will begin to save more, but hardly anyone will take the time to invest their money. If you do not invest your money, then you are susceptible to having a little devil slowly eat away at your savings that you worked so hard to accumulate.

And the devil’s name is INFLATION.

Inflation

In order to understand inflation, you have to understand what money is and how it works. Money is a medium of exchange that people must agree has value. The problem with money is that the value of money is constantly eroding due to inflation.

Inflation is the constant increase in the real price of goods over time. Just think about restaurants and/or grocery stores that you regularly go to. Over a period of years, the price of goods and services begin to gradually increase. When I think about inflation, I think about my Chipotle burrito that used to cost me $7.99, but now costs me $9.50 for the same burrito a few years later.

There are a number of metrics that try to measure inflation like the “Consumer Price Index (CPI), which measures the comparable price of a list of goods from year to year, or the “Producer Price Index” (PPI), which measures suppliers’ costs to make a certain item. Inflation on average increases about %2 every year, meaning that the cost of goods and services on average have been increasing at %2.

This means that the $100 you have today will not be able to buy you the same amount in the future as the price of goods would have increased and your real purchasing power will decrease.

Eating Away At Your Savings

As people begin to build up their savings account, there is a real need to understand why you are saving and what you are saving for. Personally, I only save enough to for my emergency fund and invest the rest.

Typically, an emergency fund should cover all expenses needed for living over a 6-9 month period. That means you should calculate how much you need to survive for food, housing, travel, utilities, cell phone plan and any other bills you pay in a normal month and multiply that by 6 (or 9) in order to make sure you won’t be homeless if you happen to lose your job or are no longer able to work. If you are older or have a more unstable cost of living, you may want to save enough for 9-12 months worth of expenses.

Your emergency fund should (1) be in a high yield bank account (like Ally Bank or ING) where it will receive a %1.5 interest rate – which is 150x better than Bank of America’s/Wells Fargo’s/Chase’s barely-existent interest rate of %0.01. (2) Any money that you have that is beyond your emergency fund should be invested wisely.

The reason for the two points above is because inflation is slowly eating away at your checking and savings accounts every day. If you don’t properly stow away your money in the best way possible, then you will be a victim of inflation.  The worst thing you can do is to leave all of your money in your checking account or under your mattress – because it is losing value every day in terms of real purchasing power.

Why You Need To Always Negotiate For A Raise

In regards to inflation, the reasons why you need to properly take care of your savings directly apply to taking care of your income as well. If you are one of the millions of people who did not receive a raise in the past year, then you are actually making less money than you did the year before due to inflation.

Besides the endless reasons you can give to as why you deserve a raise, keeping up with inflation should dictate that you get, at the minimum, a %2 raise every year just so you are making the same amount as the year before.

Not receiving a pay raise is absolutely absurd in today’s environment. Corporate profits are higher than ever if you are working for a major corporation. Corporate tax rates have been cut from %35 to %20. The unemployment rate is at an all-time low, meaning that it’s hard for employers to find the proper candidates to fill open positions.

Instead of giving employees the raises they deserve, corporations are focused on buying back their own stocks (during one of the most expensive times in the stock market) and executive bonuses. Heck, even the CEO of Sears, which is a dying retail department store, received an $850,000 bonus! Like, wtf?! Are you kidding me?! As the company is closing dozens of stores and firing hundreds of workers, the executives at the top are still getting huge raises!

This outrageous difference in compensation will only make the widening gap of inequality even wider.

Do your part and negotiate for the salary you deserve because if you don’t, who will?

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Thanks for reading!

– Jack

5 comments

    1. Thanks Ellen!

      It is always hard to try to explain a concept while being detailed enough to clearly get the idea across, but at the same time not getting to nuanced in the intricacies.

      Also, the Sears thing is really dumb.

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