Inflation: What’s the Problem?

Abstract

If you have read this far, then I’m going to make an assumption: your finances look similar to Mr. and Mrs. Fit’s, or you have a detailed plan in place to achieve that kind of financial fitness over the next few years. At this point you may be thinking to yourself, “If my finances looked like Mr. and Mrs. Fit’s, then I wouldn’t have a problem!” You’d be right—you wouldn’t have a problem, you’d have three major problems:

• What will I do if my monthly expenses rise significantly due to price inflation but my cash reserves don’t increase in value by the same amount due to a low-interest-rate environment?

• What will I do if my savings don’t even generate a positive real rate of return due to interest rates being lower than the prevailing inflation rate?

• What will I do if my retirement or investment account loses significant value just before I need it, or it doesn’t generate a reasonable risk-adjusted return that’s greater than inflation rates?