Money is Purchasing Power
What is Purchasing Power?
Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you would be able to purchase. You lose purchasing power when prices go up and gain purchasing power when prices go down. We can’t talk about purchasing power without talking about inflation.
Inflation changes the value of a currency over time. Many of us have had that time tested conversation with someone older than us from a different generation, which goes a little something like, “Back in my day…” And is usually followed by something like, “We could get ten pieces of candy for one nickel...” You get the idea. What a dollar, or a nickel for that matter, buys today is not the same as what it bought even just ten years ago. Although, with pricing increases, so has the federal minimum wage.
Inflation is tracked via the Consumer Price Index (CPI), which tracks the cost of a “basket” of a variety of goods and services. Each month, the U.S. Bureau of Labor Statistics (BLS) takes the average cost of the items in order to determine the change, over time.
What Does Purchasing Power Affect?
Purchasing power not only affects consumer goods and services, but it also impacts stock pricing. It can also affect the general health of the economy. Interest rates can also your purchasing power as an individual. Economists also compare purchasing power in The United States of America to that of other countries, looking at the same basket of goods in two separate countries and seeing how the U.S. dollar measures up in the other country, taking into account currency exchange rates.
How Does Purchasing Power Affect My Investments?
Rising inflation can corrode the purchasing power of your investments. Essentially the amount of money you invest can be worth less when you need it. For this reason, it is of utmost importance to focus on investments that will earn a rate of return greater than the value of rising inflation. When considering how purchasing power affects your retirement goals, it is important to remember that the only sane goal when it comes to retirement planning is to be able to maintain the purchasing power you have from day 1.
This is where your financial planning team at Grover Financial Services comes in! We work with you to ensure that you are in a portfolio that will uphold its purchasing power over time, standing up against inflation, but a risk level you are comfortable with. Your life and financial goals can change over time, make an appointment to meet with us today to ensure that you are on the right track to meet those goals and have the purchasing power you need when you need it!
Stay tuned for part 4, where we will dive into market timing madness!
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