By Adam Jusko, ProudMoney.com, firstname.lastname@example.org
When we buy a house, we expect that its value will go up over time, and we’ll sell it for more than we bought it for. When we buy stocks, we expect that the price will rise and we’ll sell them for more than we bought them for. And yet, when we go to the supermarket, we shake our heads at the fact that a cart of groceries that used to cost us $100 now costs $150. We want the upside of rising prices, but we put blinders on when it comes to the downside — a dollar doesn’t buy what it used to, and tomorrow it will buy even less. Forgetting this fact can seriously hurt your financial picture.
Price inflation and our need to outrun it is a central idea in Chad Gordon’s helpful and enjoyable book, Wealth By Virtue. Gordon does a thorough job explaining how the world keeps getting more expensive, but our inability to completely comprehend this fact makes us choose financial strategies and products that actually make us poorer — even while our bank balances are going up. If we truly want our money to grow in a way that means more purchasing power (or at least as much purchasing power as we have today), we need to get a return that is higher than the rate of inflation. If you’re making 1.5% on your savings while prices are rising 2%, you’re falling behind, regardless of how satisfying it feels to look at your growing balance. (Not that 1.5% is getting anyone super excited.)