Eroding Factor #2: Inflation

How many of us remember our parents or grandparents telling us stories of when they used to go to the baseball games and get a hot dog and a drink for around fifty cents back in the day? Today that same ball game plus hot dog and a drink would easily cost you fifty dollars, unless you’re going to a game at Yankee Stadium or Fenway Park. Then it might cost you about ten times that amount.

So what exactly is inflation? As you may have guessed from the story above, inflation is the progressive increase in the price of the everyday goods and services that we purchase. In other words, every year your dollar will buy less than it did the year before. With the average annual inflation rate of about 3%, your one dollar cup of coffee will only buy a .97 cup of coffee the next year. Let’s look at this from another angle. You have $10,000 in your savings account that you plan on leaving for ten years. In ten years, the future value of your $10,000 is only $7,374.24. You’ve lost just over 26% on your money just by letting it sit over a ten year period.

Eroding Factors #3 and 4: Technological Change and Planned Obsolescence

I got my first cell phone for my birthday about nine years ago. I remember thinking how great it was that I could finally talk to other people while I was out of the house. What a great improvement in technology. Now, nine years later, I would never have thought that I would be checking my email and using the Internet from my phone. Technology is improving everyday, and at a rapid pace.

With these advances in technology we are constantly purchasing new goods or services to improve our lifestyles, make our jobs easier or more efficient, or quite frankly, to keep up with the Joneses. The point is, we purchase these things every year, whether we have an immediate need for them or not. This is a trend that will likely be a part of our lifestyle year after year.

When compared with technological change, planned obsolescence is very similar in nature. Every product that you will ever buy will have a certain life span attached to it. When this life span is completed, you have a need to go out and buy a replacement for that product. This is called planned obsolescence. The producers of these products create these goods keeping in mind that once a product becomes obsolete, the consumer will come back to purchase another product.

Although these three money eroding factors may seem small when compared to the effect taxes have on your wealth, they can be quite significant when added together in an individual’s bottom line. Stay tuned for the next six money eroding factors.