If you have been listening to the news or reading the papers lately, you may have heard the term Inflation surfacing. For the next few months, I am going to introduce you to some terms you should become familiar with for your own financial well-being. I am a strong believer that women need to improve their financial literacy so to have a good handle on their finances. This month's article will start Financial Literacy 101. The first term we will become familiar with is Inflation.
"Inflation" influences your money, or better yet, your purchasing power. In the past we have talked about organizing our money with a budget so we have more control over our expenses. But, inflation is an outside interference we have no control over. Let's define inflation:
is defined as a rise in the prices of goods and services we purchase over a certain period of time. It is usually calculated on a yearly basis but does sometimes change with economic cycles as well. When this increase happens, each unit of currency we use buys fewer goods and services than what we purchased before this increase occurred. Let me give you some examples.
I am a firm believer that women have an inflation of their own, besides the inflation that affects everyone else in the economy. I have a full seminar on "A Women's Inflation" if you are interested in hearing it. Let me prove my point to you on a women's very own inflation.
How much do you spend on make-up yearly? Let's talk eye make-up, foundations, lotions, creams, and some of the tools we need to apply these products. For instance, brushes and pencils. I would guess I spend somewhere around $500/year and that depends on how fast I run through foundations and face creams. They seem to be the most expensive for me because I want a good product. Now ask yourself, how much do men spend on razor blades and shaving cream in a year? I would guess it is around $100.00. The creams aren't expensive, but the blades can be.
Let's do another example. Dry Cleaning. For women to dry clean a blouse it is usually around $3, a dress is even more. With a man's shirt, it can be launder for a special price of $1.00 per shirt; we pay 3 to 1 the price of our male counterpart. Now, it is not their fault that we pay more, it's just that we have our own inflation on top of what we deal with in our economy for other goods and services we purchase. This is just another reason why it is so important for women to build a larger nest egg then men; it cost us more to live.
When we are talking about inflation, we are also talking about "purchasing power"; both terms go hand in hand. Because of the increase in inflation, you now have a reduction in the power to purchase based on the unit price of the money you are using. It is a real loss in the value of that money. The unit of currency we are talking about here is the dollar.
If a person's monetary income stays the same, but the price of the goods and services she buys increases, the purchasing power of that income FALLS. Inflation does not always imply falling purchasing power of someone's money if their income increases along with inflation. Someone with a higher "real" income will have more purchasing power since real income refers to the income that was adjusted for inflation. Both Inflation and Purchasing power seem to go together, but they don't mean the same thing.
The current rate of inflation now, year to year (YOY), is about 2%. That is a far cry from what inflation was back in the late 1970's when I was in the market to purchase my first home. Back then; 1979, inflation was 13.3%! Interest rates on mortgages were about 11%. Talk about loss of Purchase Power!
Currently we are seeing a rise in our fuel prices, interest rates on our credit cards, and mortgage rates as well. Almost everything we buy will be affected by inflation sooner or later. Inflation also affects our retirement goals for the money we expect to have in our retirement. When you are trying to figure out how much you'll need in retirement to live the lifestyle you are anticipating, you need to consider inflation and taxes on your wealth as well.
Remember, I am here to help. If you would like to discuss this article, or previous articles that have been on the blog, please be sure to join us the 3rd Saturday of each month. We will discuss how these topics affect your own financial well-being. By getting feedback from other women at these gatherings, you may also feel more confident you have a better handle on your own finances. I hope to see you ladies soon.