Inflation Rate

After reading my previous post, Needs and Wants, have you got the idea on how much you have spend on your needs and wants? Well, in order to know more in exact on the pattern of your spending, I suggest you to look into at least past 3 years records. Also, by doing so, you will be able to get your personal inflation rate.

So, what is inflation rate? It is a rate to calculate how the prices of goods are moving. If the rate is moving upward, we call it inflation. On the other hand, if the rate is going south, we name it deflation. Isn’t that simple?

OK, now, we always get the image that national inflation rate is between 2~3 %. Does it mean that your inflation rate is about the same? Don’t ever to think of that. You may surprise, after finished the exercise above, that your personal inflation rate is outpace national inflation rate. National inflation rate is calculated based on actual price movement with the weight assigned to each category. As for personal inflation rate, you weight on each category will be different from national. For example, when there is an increase in the price of sugar, the personal inflation rate for low sugar users will be much less than heavy users. Get the picture?

As you have categorized your spending into needs and wants, we require only needs portion to calculate personal inflation rate. The reason is very simple. Just imagine after you retire, will still have spare money on your casual spending or will you focus on what you actually needs?

Now, by dividing current year spending needs over the previous year and you will get the inflation rate. For example, your current year spending needs is $34,500 while previous year was $33,000, your inflation rate will be 4%.

(($34,500 / $33,000) - 1) * 100 = 4%

From this calculation, you should realize that, even if you spend only $125/month extra a month, you are actually creating 4% inflation. Wow!

So, go to work on your own inflation rate now and think about how to control it. Of course, in order to achieve financial freedom, one of the critical success factors is to learn how to control your personal inflation rate.