While many people view inflation as a negative phenomenon, some financial benefits can be gained from it. In this article, we explore three of the surprising economic benefits.
Reduced debt burdens
Understanding that money loses value when inflation increases, the real value of your fixed loans will also be reduced. Inflation is like an invisible hand, which magically alters the value of your dollar without you even noticing it. A $100,000 fixed mortgage a year ago is now $95,000 in real terms with inflation increased by 5%. So you have to recognize the impact of inflation on the value of the dollar you have vs. what you owe and payoff your debt faster during higher inflationary periods:
For example, let’s say that you borrowed $40,000 on a fixed-rate loan to buy a new car two years ago. You got a great rate of 4%, and have made your payments regularly and on time. At the time of purchase, your debt and the car were the same value. Now, because of inflation, your car is still worth $40,000 but you only owe $30,000 on the loan now. This means that if you sold your car, you could pay your debt off and walk away with $10,000 cash. Without inflation, your car would likely have declined in value and continued to be equal to or less than the loan amount over time.
Increased earning power
Another financial benefit of inflation to individuals is the potential for higher earnings as the job market tightens. If you stay in the same job, employers might index to inflation to keep you earnings on par; however, you can increase your income in the order of 10% by changing jobs because inflation puts pressure on employers to pay more to hire or retain valuable talents. What do you do with this extra cash?
For example, if you earn $50,000 per year and there is an inflation rate of 3% per year, your salary would likely increase by approximately $1,500 per year to keep up with the rising cost of living. This means you would have more money available to payoff debt or invest.
Higher investment returns
A final financial benefit of inflation is the potential for higher investment returns. Inflation can increase interest rates, making it more attractive for investors to put their money into savings accounts or other interest-bearing investments. As a result, the returns on these investments can be higher than they would be in a low-inflation environment.
For example, if you invest $10,000 in a savings account with an interest rate of 4% per year and an inflation rate of 3% per year, the real value of your investment would increase by 1% per year. This means that, after 10 years, your investment would be worth approximately $13,400, even after considering the effects of inflation.
In conclusion, while the media focuses on the negative impact of inflation, take note that there also have some financial benefits. By reducing the debt burden, increasing earning power, and boosting investment returns, inflation can help to improve your financial wealth. It is essential to monitor inflation rates carefully and to take appropriate steps to manage the impact of inflation on your finances.
At CleveDoesMore, the best part of our job is helping people make informed choices to minimize their risk while building equity and wealth for their future.