Inflation refers to the gradual increase in the prices of goods and services over time.
When inflation occurs, the purchasing power of money decreases because you can buy less with the same amount of money.
In other words, your money loses value.
To understand inflation, let’s imagine a scenario with everyday objects.
Imagine you have a basket of groceries that cost $100 today.
However, due to inflation, the prices of those groceries increase by 5% annually.
In one year, the same basket of groceries would cost $105, and in ten years, it would cost around $163.
As you can see, the same amount of money buys you less over time.
Investing to counteract inflation
Investing offers the potential to grow your wealth at a rate that outpaces inflation.
By investing your money wisely, you have the opportunity to earn a return that exceeds the inflation rate.
This means your money has a better chance of maintaining or even increasing its purchasing power over time.
For example, let’s say you invest your money in a diversified portfolio that historically has provided an average annual return of 8%.
If the inflation rate is 3%, your investments are growing faster than the erosion of purchasing power caused by inflation.
This way, your investments can help preserve and potentially enhance the value of your money.
It’s important to note that investing involves risks, and there are no guarantees of returns.
However, historically, investing in a diversified portfolio of assets like stocks, bonds, and real estate has shown the potential to outpace inflation over the long term.
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