If you are trying to stay up to date on economic trends and how they affect your investments, then you’re probably already aware that one of the main threats to stability and effective wealth management is inflation. But why exactly does inflation cause so many problems? Here is a quick rundown of how a weaker dollar can hurt your wallet and the nation:
- Shoe Leather Costs. Inflation causes people to waste time, energy, and resources in a wide range of ways. For example, a weaker dollar means that people must go to the bank more often to replenish their funds. (This is why the costs associated with inflation are called “shoe leather costs.” The term refers to the increased wear and tear incurred by your personal belongings such as your shoes.) Other examples of shoe leather costs include the energy needed to frequently change prices and the interest incurred by paying with a credit card when no cash is on hand.
- Distortion of Relative Prices. Inflation can cause the prices of items to change so quickly that not everyone can keep up with the real value of everything on the market. This causes both individuals and stores to make illogical decisions at times, drastically overpaying or selling themselves short.
- Distortion of Tax Brackets. Inflation tends to move far quicker than governments can (or even want to) respond. This means that lower income people can be quickly pushed up into higher level tax brackets that were intended for wealthier segments of society.
- Impossibility of Contracts. Inflation makes long-term planning and economic contracts irrational if not impossible. Imagine loaning someone enough money to buy a house, only to discover that, in the moment of repayment, the sum of money that they returned you is only enough to buy a nice meal!
- Inflation and Your Savings. Now imagine putting away enough money to buy a house — only to discover that, at the time of your retirement, that money is only enough to buy a nice meal! That is the threat that inflation poses, and even if the falling dollar is not that drastic, it can still cut into your savings. That is why savings must be diversified. If you are interested in protecting your hard-earned savings, then we encourage you to visit Red Rock Secured online today.