We get a lot of “interesting” comments on TikTok and Instagram explaining why saving tons of money to enjoy life more is a dumb idea. In the past few months, the most popular argument against us has gone something like this:
“By the time I save a million dollars to retire early, a loaf of bread will cost $1,000!”
These criticisms are always super exaggerated. But in fairness, they are based on a legitimate concern. As I write this in February 2022, prices really are rising at the highest rate since the early 1980s (around 7% annualized). People are worried about inflation.
Luckily, inflation isn’t new and mysterious. It’s been around forever, so everyone should really be expecting and planning for it — in any year. Once you know how to do that, it’s not quite as scary any more.
Inflation Definition: What Does It Even Mean?
Have you ever heard your angry uncle complain that the government is printing too much new money, and then refer to that as “inflation?” That’s a real thing, and it’s called monetary inflation. But it’s generally not the kind of inflation that’s talked about on the news.
The type of inflation most people really care about is called price inflation. It’s a measure of how fast the average price of everything is going up over time. Monetary inflation is a big cause of price inflation, but it’s not the only factor.
Price inflation is the “bottom line” — it’s the number that corresponds to your actual expenses. It’s the reason why your grandma complains that a candy bar costs a dollar when it used to be a quarter. This is the kind of inflation we’re gonna focus on from here on out.
The government estimates inflation by tracking the average price of a “basket of goods and services” over time and seeing how it changes. They call this the consumer price index (CPI). If the CPI goes up 4% in a year, you’ll hear on the news that “inflation averaged 4% over the past year.”
There’s a lot of debate about how the consumer price index is calculated and measured, and it’s definitely not perfect. But for long-term, ballpark calculations, CPI works fine. So we’ll stick with that.
Considering Inflation in Everyday Life
People often draw irrational conclusions about money when they don’t know a lot about inflation. Some people ignore it entirely (like old people who think $8 an hour is still a great wage), and others dramatically exaggerate its effects (like a TikTok commenter who told us that a billion dollars will buy 1-2 cups of coffee in 100 years).
Calculating Inflation the Quick and Easy Way
Fortunately, inflation isn’t actually that hard to take into account correctly. If you want a quick and dirty method based on historical data, you can assume that average prices double about every 20 years. That assumes a 3.5% annualized rate of inflation over the long run, which is reasonably close to average for the US Dollar.
I recently looked up my grandparents’ old house on their local property appraiser’s website and saw that they paid $45,000 for it in 1978. Using my rule of thumb for inflation, I figured it should have been worth about four times that amount in 2018 (doubling twice over a period of 40 years) — $180,000.
I looked up its price history on Zillow and found out that it was actually worth around $218,000 in 2018 — pretty close for a quick guess across four decades!
You can use this method to give you a fast estimate, but don’t expect perfect results every time. Inflation sometimes varies wildly from year to year, and it doesn’t apply to all prices equally. For example, the price of real estate has risen a little more rapidly than the consumer price index over the past 40 years.
Adjusting This Blog for Inflation
On this website, we share a lot of our own, personal financial numbers. By default, we report nominal dollar values — that means they’re not adjusted for inflation. If they were, we’d have to update every single number on the site, every year!
Instead, we try to always be transparent and include a reference year for all of our info, so readers can do the math themselves if they want to (it’s a good habit to get into!).
The easiest way to account for inflation accurately across shorter time spans is to look up the exact “cumulative inflation” between a date in the past and present day, and apply it to the number you’re looking at.
For example, when we talk about how we spent $2,800 on a crappy Nissan Altima in January 2016, you might wonder, “how much is that in today’s money?” Well, cumulative inflation between 1/2016 and 2/2022 has been about 19%. To calculate the equivalent dollar value today, simply multiply our purchase price by 0.19 and add it back in to the original purchase price:
($2,800 original price × 0.19 inflation factor) + $2,800 = $3,332 equivalent in 2022
Just for fun, here are a few numbers from across our site, inflation-adjusted to present day (2022):
- Our total monthly spending for two people in Hawaii was around $1,900 ending in early 2016, which is about $2,200/mo today.
- In Orlando, Florida, we saved $100k in 2 years on ~$40k/yr salaries ending in 2015, which is more like saving $118k in 2 years on $47k/yr salaries today.
- We hit our first quarter-million-dollars in net worth at age 26 in February 2017, which is equivalent to a net worth of $290k measured in today’s money.
- In 2019, we spent nearly $37k to visit every National Park in the USA. That same trip might cost more like $42k today.
Inflation-Adjusted Wages
Here’s another thing most people don’t think about: The price of labor is subject to inflation just like everything else. As the price of goods increases, the amount you’re paid at work usually increases, too — at least in the long run.
A relative of mine who’s been out of the job market for quite a while was telling me about some of her recent experiences. She mentioned that she was making $15 per hour at her job in the early 2000s, and she hoped to make at least that much at a new position.
But she had forgotten to take inflation into account. $15/hr in 2000 is equivalent to more than $25/hr today (in 2022). To be in a better position now than she was then, she would need to earn nearly double her old wage!
Think about this the next time you’re negotiating with your boss:
A lot of employers offer annual raises in the 3-4% range. But since the average inflation rate is in that same range, they’re actually not offering any real wage increase at all. If you’re trying to increase your salary’s buying power over time, you need to demand more.
How To Beat the US Inflation Rate
We’ve noted that while inflation tends to increase the price of stuff over time (ugh), it also increases wages. Those two things kinda cancel each other out, so who really cares?
Well, anyone who wants to save money over time cares — a lot.
When you save a dollar, it buys less and less stuff with each passing year. Holding on to cash is devastating in the long run. To eliminate this problem, it’s important to invest your money instead of saving it.
Productive investments are specifically designed to grow faster than inflation. These are things that generate wealth as long as they’re held, like stocks or rental real estate.
When you buy stock in a company, that company actually does work in the world — like growing food, building cars, or writing software. And that activity generates profits, which can significantly outpace inflation.
You can tap into the profits of thousands of companies at the same time by investing in a stock market index fund. That’s exactly what we do. Over the long run, US stock market index funds have averaged a nominal (not inflation-adjusted) total return of 10-11% per year, implying a real (inflation-adjusted) total return of about 7-8%.
Investing is the only way for savers to beat inflation, but it’s worth noting that all investments come with risk, so make sure you understand those risks before getting started.
Don’t Worry Too Much About the Current Inflation Rate
This article may have piqued your interest because you’ve been watching a little too much news, and you may have been led to believe that the sky is falling. A lot of people are convinced that high inflation is gonna destroy their financial future. But I’m here to tell you that’s probably not true.
In the past, inflation has soared as high as 20% per year and even dropped into negative territory — but the long-term average has worked out to a manageable 3-3.5% annually.
Prices may spike at times, but over the long run, the amount of money you make at work will probably more than keep up.
If you’re living far below your means and investing your money instead of letting it sit idle in a not-so-high-yield savings account, you’ll be gaining ground with each passing year instead of losing it.
And, by the way, if you’re planning on an early retirement based on the 4% rule, inflation is already baked into the math there, too. You should always stay flexible since finance isn’t an exact science, but you don’t need to overthink it!
Inflation can suck sometimes. But overall, life’s good. So keep calm, keep investing, and don’t forget to go outside once in a while.
— Steven
