Unless you’re already a billionaire, who doesn’t want to be a millionaire? Being able to call yourself a millionaire has been a milestone for many. It has a nice ring to it and generally implies that you’ve achieved a financial goal. While this may all be true, being a millionaire doesn’t go as far as it used to.
It is all about inflation. Being a millionaire 20 years ago is nowhere near the same thing as being a millionaire today, just as being one today will be nothing like being one 20 years from now. Because of inflation, everything increases in cost over time—a gallon of milk, a loaf of bread, real estate, automobiles, and even salaries.
If you’re old enough to think back 20 or 30 years ago, think about how much a gallon of gas cost, how much you paid for your first car or house, or even what your starting salary was. If you look at those numbers in today’s dollars, it seems like things cost next to nothing back then. The same holds true today, and 30 years from now when you look back to 2007 it will be the same.
Consider this—if you had $1,000,000 sitting in the bank today and inflation continued along at the average 3% rate for 30 years, by then your $1,000,000 would essentially only be worth $400,000. So, in order to have the equivalent of a million dollars 30 years from now, you’d actually have to have over $2.4 million in the bank today.
This brings up a few important issues, especially for younger people. First, it demonstrates how much of an impact inflation has on your money over long periods of time. With people living longer than ever before, this could mean 20-30 years of retirement where this money has to last and provide income. With inflation constantly eroding the value of your dollar, you need to make sure there is enough saved to endure the effect of inflation and taxes.
Second, it shows just how important it is to earn enough interest on your savings to counteract inflation. If your money is sitting in a bank account earning 3% interest while inflation is also at 3%, at best you’re breaking even. But what is more likely is that you’re actually losing money because of taxes that you’re paying.
So remember, becoming a millionaire is a great net worth goal to set, but if you are planning for the next 30 to 60 years, that million won’t go very far at all.
Here are some tips to help you make the most of your money and fight the effect of inflation:
It is all about inflation. Being a millionaire 20 years ago is nowhere near the same thing as being a millionaire today, just as being one today will be nothing like being one 20 years from now. Because of inflation, everything increases in cost over time—a gallon of milk, a loaf of bread, real estate, automobiles, and even salaries.
If you’re old enough to think back 20 or 30 years ago, think about how much a gallon of gas cost, how much you paid for your first car or house, or even what your starting salary was. If you look at those numbers in today’s dollars, it seems like things cost next to nothing back then. The same holds true today, and 30 years from now when you look back to 2007 it will be the same.
Consider this—if you had $1,000,000 sitting in the bank today and inflation continued along at the average 3% rate for 30 years, by then your $1,000,000 would essentially only be worth $400,000. So, in order to have the equivalent of a million dollars 30 years from now, you’d actually have to have over $2.4 million in the bank today.
This brings up a few important issues, especially for younger people. First, it demonstrates how much of an impact inflation has on your money over long periods of time. With people living longer than ever before, this could mean 20-30 years of retirement where this money has to last and provide income. With inflation constantly eroding the value of your dollar, you need to make sure there is enough saved to endure the effect of inflation and taxes.
Second, it shows just how important it is to earn enough interest on your savings to counteract inflation. If your money is sitting in a bank account earning 3% interest while inflation is also at 3%, at best you’re breaking even. But what is more likely is that you’re actually losing money because of taxes that you’re paying.
So remember, becoming a millionaire is a great net worth goal to set, but if you are planning for the next 30 to 60 years, that million won’t go very far at all.
Here are some tips to help you make the most of your money and fight the effect of inflation:
- Create a Budget - If you create a budget and stick to it, you can stash away more money that can significantly grow over time.
- Buy Only as Much Home as You Can Afford - Over the long-term, real estate doesn't perform very well in respect to inflation. Stick with only as much house as you can afford and accelerate your other investments.
- Pay Yourself First - You've heard it before, but the key to building wealth is to pay yourself first. Set up an automatic savings plan to put your saving on autopilot.
- How Inflation Affects Your Investments - Learn more about how inflation can have a serious impact on your long-term wealth accumulation.
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