DEFINITION:
Inflation is the rate at which the general level of prices for goods and services rises, reducing the purchasing power of money.
WHEN AND WHY IT’S USED:
Inflation is used to measure how the cost of living increases over time and is a critical factor in long-term financial planning. It affects everything from daily expenses to investment returns, making it essential to consider when setting savings goals and retirement plans. By accounting for inflation, you can better understand the future value of your money and the real growth of your investments.
IMPORTANCE IN COMMUNICATION:
Discussing inflation with your advisor is important because it affects every aspect of your financial life. Clear communication about inflation ensures that you are prepared for future increases in living costs and that your investment strategy includes measures to outpace inflation. This understanding can influence choices in asset allocation and income planning.
Additionally, by discussing inflation, you can better grasp the real returns on your investments. This dialogue helps you and your advisor adjust expectations and strategies so that your financial plan remains robust even in the face of rising prices.