Have you ever stopped to think about the sneaky little dance happening in your wallet every single day? It’s a constant tango between inflation and its inseparable partner, purchasing power. The truth is, you really can’t have one without the other!
Most of us don’t spend our free time pondering economic concepts, but understanding purchasing power is absolutely crucial if you want to hit your long-term goals and achieve true financial independence. Think about what financial freedom really means to you: it’s having the exact standard of living you desire, paid for in inflation-adjusted, after-tax dollars, all without ever having to get out of bed and punch a clock again to keep it going. Sounds pretty amazing, right?
But here’s the catch. To reach that level of freedom—and actually hold onto it—you have to plan for how inflation will slowly chew away at the value of your money over the next ten or twenty years. If you don’t build a sturdy shield around your hard-earned lifestyle, you might end up in the incredibly tough position of heading back into the workforce long after your retirement party. Sadly, we’ve seen this become a harsh reality for retirees who had to find jobs again following the heavy economic shock and soaring living costs brought on by the 2020 pandemic.
So, what exactly is purchasing power? It’s simply a measure of how far each of your dollars goes when buying the everyday goods and services you need to live. You’ve probably heard friends or family joke about trying to “stretch their dollars” or feeling like “there’s way more month than money.” That’s shrinking purchasing power in action.
When you are living on a fixed income, even a modest annual price increase of 2% (the official target set by Canada’s Central Bank) means you will have to burn through your savings faster and faster just to maintain your current lifestyle. If you ever doubt this, just ask someone who has been retired for a decade or two! Or, simply think back to your own childhood. Remember when a chocolate bar cost just a dime instead of $1.50? Ask a senior, and they’ll gladly remind you that an average family car today costs about the same as what they paid for a nice house back in the 1960s.
That’s exactly why inflation and purchasing power are two concepts you absolutely have to keep in mind when designing your wealth-building and wealth-preservation strategies. Keep in mind that inflation isn’t just about the rising price of groceries or wage bumps. It also shows up as a general surge in asset prices—think real estate and equity investments—and an increase in the total amount of money floating around the economy.
So, the next time you hear a news report about a government go ahead with “monetary easing” policies, pay close attention. Often, these large-scale strategies are designed to fix massive public debt problems or solve sluggish economic growth. However, a major side effect is that these actions can stoke more inflation and deliberately reduce your future purchasing power.
The great news is that you don’t have to be a victim of inflation. With the right financial strategy, you can actually use these economic forces to your advantage. Reach out to a financial professional to discuss how you can adapt your portfolio today to protect your financial health for tomorrow!
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