Purchasing Power

My how we all wish we had more of it! Unfortunately, there's no quick fix for enhancing your purchasing power -- doing so requires good old fashioned hard work (education or performance for a raise or better job) or a windfall like an inheritance. There is, however, one concept every LMF4HMW reader should understand with regard to her purchasing power: inflation.

Have you ever heard people talk about the "good old days" when bread was $1 and gas was 90 cents? Even if they don't realize it, these folks are discussing inflation, or the increase in general price levels. When price levels rise, your purchasing power falls. So if you continue to make the same amount next year, but your rent or food prices rise by 3%, your purchasing power will decrease accordingly. What's most important is the relative rise in wages, not the price level per say. So if you get a 5% raise and inflation is at 3%, you're actually ahead by 2%.

Inflation is measured by an annual percentage rate and is reported in the consumer and producer price indexes. (Both are available on the Bureau of Labor Statistics website.) You might think that inflation is "bad", but it's normal in a growing economy. If there is none, there is either economic stagnation or weakening.

In addition to affecting your current purchasing power, inflation is an important factor in your future ability to spend. If your investments do not outpace inflation, you'll have decreased purchasing power. Most people make the mistake of forgetting about inflation entirely when looking at their portfolio -- the key is to look at the real rate of return (net of inflation), not the nominal rate.

Wine pairing: Gruet sparkling wine from New Mexico (yep!) is a steal at $13!