Inflation and TVM. What do they mean to you?

TVM means "Time Value of Money."

The simplest way to explain it is to say that $1 is worth more today than it will be tomorrow. It also explains why things keep getting more expensive, since $1 yesterday is worth more than $1 today. When the cash money you have loses its value over time, economists call that, "inflation." Like a balloon, the cost of everything 'inflates' and gets bigger over time.

Here's what this means to you: Every dollar you have is a leaking bucket. Just imagine the value dripping out drop by drop. Depending on the time period you want to focus on, inflation has typically been between 3% and 4% in the United States. So how much do you have in savings or checking accounts? Its nice and safe there, all nestled in with its FDIC coverage. But you know where this is going.

Let's say you start with $1,000. To see what it will be worth next year, multiply by 0.96.
In our example, your money is now worth $1,000 x -.96 = $960 even though your bank statement still says $1000. You lost $40 worth of value.
To see what happens after one more year, multiply your new number $960 by 0.96. $960 x 0.96 = $921.60. And you lost another $38.
What do you think you have left in 10 years? The answer is $664.83. You lost $335.17. And here I thought the stock market was risky!

Fact is, cash money is dead money and it is almost guaranteed to lose value. In the past 50 years, there was not a single year that cash money did not lose value. In the economic world, that's about as close as you can get to a sure thing. Or is it?

Log in tomorrow for our discussion on Deflation.

Check our data: www.inflationdata.com is a good source for historical inflation numbers.