Imagine walking into your local grocery store with a $20 bill. Last year, that might have bought you a gallon of milk, a dozen eggs, and a loaf of bread with change to spare. Today, those same items could cost noticeably different amounts and $20 may not cover as much. This everyday experience demonstrates the concept of purchasing power—how much your money can actually buy. Understanding this concept helps you make smarter financial decisions and grow the value of your funds over time.
What Shapes Your Money’s Value?
Your purchasing power changes as the economy changes, influenced by various economic factors. Inflation and purchasing power are inversely related—when prices rise, the amount of goods and services you can purchase with the same amount of money decreases. And, conversely, when prices decrease, you can buy more.
Think about buying a car. The same $30,000 that bought a well-equipped sedan five years ago might only buy a basic model today. Or consider housing—monthly rent that was $1,500 a few years ago might now be $2,000 for the same apartment.
Understanding purchasing power isn’t just about watching prices go up and down, however. It’s about learning how economic changes affect both your spending and saving strategies. This helps you make smarter decisions to protect your money’s value in the years to come.
Making Your Savings Work for You
One way to counter inflation and preserve purchasing power is through smart savings choices. Traditional savings accounts offer accessibility, but interest rates can vary widely. High-yield savings accounts, for example, often provide significantly better returns than standard accounts, while government securities, such as Treasury bills or savings bonds, offer other secure savings options.
For instance:
- If you had $10,000 in a regular savings account earning just 0.1% annually, after five years, you’d earn around $50 in interest.
- By contrast, in a high-yield savings account earning 4% annually, you’d earn about $2,166 in total interest over the same period.
A financial advisor can help you explore savings options that best fit your goals, making it easier to protect your purchasing power over time.
Planning for a Comfortable Retirement
When planning for retirement, understanding purchasing power becomes especially important. A lifestyle that costs $50,000 per year today will likely cost a different amount in the future. Similarly, what you can buy with a $1 million retirement fund today will not equal what you can buy with the same amount 25 years from now.
Your spending patterns in retirement usually shift over time:
- Early Retirement: Often marked by discretionary spending on travel and hobbies.
- Mid-Retirement: A time when housing needs may shift, perhaps toward downsizing.
- Late Retirement: Typically, expenses for health care and support services increase.
Over a retirement that might last decades, changes in purchasing power could mean that what seems like ample savings now might cover far less in the future. A financial advisor can help you create a retirement strategy that aims to keep pace with rising costs, especially for essentials like health care.
Career Development and Income Potential
Career growth is another way to help protect your purchasing power. For instance, if you start with a $50,000 annual salary, adding certifications or new skills could boost that to $75,000 or more—helping your income keep up with rising costs. Continuing education, professional certifications, and skill development allow you to stay competitive and command higher earnings. Side income from consulting or freelance work can also diversify and strengthen your income.
Building Long-Term Financial Security
Protecting your purchasing power isn’t about predicting economic trends; it’s about staying prepared and adaptable. Understanding financial tools and regularly updating your strategy can make a significant difference.
Taking Action
Start with these steps to better manage your purchasing power:
- Track Key Prices: Choose your top 10 most-purchased items, track their prices for six months, and adjust your budget as needed.
- Shop Around for Savings: Check savings account interest rates every January to see if higher-yield options could help grow your savings.
- Invest in Your Skills: Identify certifications or training that could boost your earning power and set a timeline for earning them.
- Adjust Your Budget Regularly: Review your monthly budget each quarter to reflect changes in prices and spending patterns.
- Meet with a Financial Advisor: Review your long-term financial strategy on a regular basis to ensure that it keeps pace with changing economic conditions.
Taking small, consistent steps can build up to significant results over time. While you can’t control the economy, you can take control of your financial future by staying informed and proactive.
© 2025 Commonwealth Financial Network®
