Inflation is One Problem Affecting Your finance but You May Not Know

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The Friend of your finance today, and the enemy of the finance tomorrow. One major threat to financial life, people do not take into consideration, is inflation. Inflation is the decreasing in power of a currency over a period of time, which usually leads to the increase in the prices of goods and services in the economy. Inflation actually measures the overall effect of price changes over different products. Usually, inflation is often a result of an increase in the production cost when manufacturing a product (cost push inflation), when the price of raw materials increases, the producer passes the prices to the consumer by increasing the price of goods and services rendered. Another cause for inflation is an increase in the demand for a particular goods or services (demand pull inflation). When there is less quantity of a good in high demand, the price of the goods increases.

While the above is very true, another reason for inflation is when there is a reason for the government through the central bank to create more money into the country in other to keep the economy running. As the currency depreciates, prices rise, and what you can buy with a particular amount of money depreciates continuously. This means that the purchasing power of the currency reduces drastically. Inflation affects everything you can think of, and while average inflation can be normal, hyperinflation becomes a very big problem. While a lot of first world countries can monitor their inflation, other countries cannot. The United States keeps it at 2% annually.

After saying all this, how does inflation affect your finance? The first thing is savings. The money saved today has a lesser purchasing power tomorrow. Let me let you understand that if the interest in your investment is 10% and the inflation rate in your country is 4%, then you just made a 6% interest. While you might be advised to save, it is important that you know that the interest received on your savings isn't up to the percentage of inflation in your country, this is because the banks also want to make profit.

When money supply increases, the value of money reduces. But while the purchasing power of a currency reduces, there are a lot of way to beat inflation in your finance. One way to beat inflation is to invest your money in places where the interest will be above the inflation rate. Commodity market usually see a rise during inflation periods because the people are interested in investing in commodities such as gold, oil, and so on. Invest in homes if you can, invest in shares that pay dividend.

Investing in yourself is another way to overcome inflation. When the inflation is on the rise, you need every skill you can get to put you above the inflation rate. In other, to be able to earn more, you should be able to give out more as well. Skill acquisition and investing in yourself is one way to keep yourself from both inflation and recession.