Tony Soprano stashed his money outside in a bag of bird food. It might make you laugh, but if you put your money in a bank account that doesn’t pay interest, your future purchasing power also suffers.
In fact, nearly a quarter of people earn no interest at all, and another 20% earn less than 1%, according to a May Bankrate survey.
Let’s say you publicly hid $40,000 in 2002, and that money still exists today. As it turns out, you need to spend $56,606.95 now to buy what you could have bought then, according to the Bureau of Labor Statistics’ (BLS) CPI Inflation Calculator. A 41% increase in about 17 years.
What is purchasing power?
Purchasing power is the value of a currency expressed in the quantity of goods or services that can be purchased by one currency unit. It may weaken over time due to inflation. This is because the price increase effectively reduces the amount of the good or service you can buy. Purchasing power is also known as the purchasing power of money.
With respect to investing, Buying Power or Buying Power is the amount of credit extended to a client based on existing margin-eligible securities in the client’s brokerage account.
How inflation affects your purchasing power
The only return that matters is the post-inflation return, Meredith said.
“If you can’t keep up with even that, your wealth will slowly drain over time,” Meredith said. “You’re not accumulating any real wealth, and local banks around here are paying very low interest rates for savings accounts compared to what you’d get from online banking.”
Sometimes, when people see monthly interest loans, they may say they “earn” a certain amount each month. Yes, people earning 0.01% a year will get an interest credit. But when you compare APY to inflation, the result is a negative return.
“You just have less to lose,” Meredith said.
According to Meredith, if the current inflation rate is around 1.6% and your APY is low, it’s like an invisible tax on your money that won’t show up on your bank statement.
“But if their brokerage account goes down 1 percent, they’re definitely going to notice,” Meredith said. “If you can’t see it, it doesn’t hurt as much.”
Although inflation is invisible, it has real consequences over time.
For some, a credit card with rewards and sign-up bonuses can be an easy way to use credit on travel. Or a sign-up bonus that helps you put money toward fees you would have earned anyway. This can save you money, assuming you pay your bills each month and pay no interest.
“People are obsessed with their credit card rewards,” Meredith said. “But they might have 100 grand seats at 0.25% (APY). So you have to look at every detail. If you don’t, you’re missing out.”
How does inflation erode purchasing power?
Inflation is the gradual increase in the prices of a wide range of products and services. If inflation is persistently high or out of control, it erodes your purchasing power — the things you can buy with the money you have. Because of inflation, the same product that sold for $2 six months ago might now sell for $4. Rising prices in turn erode people’s savings and thus their standard of living
What is the Consumer Price Index?
The CPI measures the prices of certain consumer goods and services over time to detect price changes that indicate inflation. These goods and services are priced by U.S. consumers as part of the Survey of Consumer Expenditures conducted by the Census Bureau for the Bureau of Labor Statistics (which publishes the CPI).