Why inflation rate is causing so much problem?

People are complaining about money everyday. People from every walks of life is complaining about not having enough money to spend. The real reason for all these complains is that many people do not know why they do not have enough money.

The real reason for not having enough money is actually because of inflation. Inflation is something that most people think they understand but in the actual fact is that they do not understand why.

A very simple way to understand inflation is to compare how many things you can buy with $100 10 years ago and now. I am very sure that you will say that you can buy more things 10 years ago than now. Now, ask this question yourself, if inflation rate is 5% annually, do you think that your pay is increasing at 5% annually? The truth is, the value of your $1 is eroding without you noticing it.

A pay increament does not mean that you can also increase your spending but a pay increament is for you to overcome the inflation rate. Let me give you a numerical example;

Inflation rate: 5%
Your pay 10 years ago: $5,000
Yearly increament: $200
Your pay now: $8,000
Inflation adjusted pay now without adding the increament: $8,114.45

From the above example, the increament is to offset the inflation rate. Hence, if there are no increament and you are still getting the same pay as what you have 10 years ago, you will have financial difficulties.

Since inflation has a negative relation with the value of money, you will need to invest your money in an asset that can give you more interest than the inflation rate. Saving your hard earned money in a bank will make you poorer and trust me, the rich and high net worth individual do not save all their money in the bank. Now, that is why the rich is getting richer and the poor is getting poorer.