# Inflation Financial Planning and Inflation Planning for Inflation Inflation and Money

An average rate of inflation is ideally incorporated into financial planning and projections such in calculating retirement income and the interest needed to meet financial goals with inflation factored in.Inflation can have large affects on the value of money over time and for this reason understanding how to use inflation rates is a useful tool when financial planing. Moreover,  Inflation is the change to spending power of one unit of a country’s currency as measured by annual percentage adjustments. For example, \$100.00 at a rate of 2.75 percent inflation will be worth \$97.25 after one year of inflation.

Inflation and time value of money:

Knowing how to use inflation rates when planning finances is a key step in optimizing one’s investments, cost management and financial needs over time. There are several ways to use inflation rates and incorporate those rates into financial planning. The first step involves identifying a reasonably accurate inflation rate for long-term financial calculations as only past inflation rates can actually be measured. One way to do this is forecasting inflation using a moving average calculation.

Once an inflation rate is identified, the next step is to find the time period for which inflation will be applied to. For example, 6 months would be a short-term inflation adjusted calculation whereas 25 years would be a long-term calculation. Generally, the impact of inflation will be lower for shorter time periods than longer ones. Thirdly, after finding the inflation rate and time period, a financial value and/or set of cash flows may be incorporated into the calculation so that one has something that is being affected by inflation. The following is an example of an inflation-adjusted calculation.

Manual inflation calculation method:

Inflation rate: 2.5% Time period: 10 years Current Value: \$10,000

Year 1: \$10,000 multiplied by 2.5%=\$250.00, \$10,000-\$250.00=\$9,750.00

Year 2: \$9,750.00 multiplied by 2.5%=\$243.75, \$9,750.00-\$243.75=\$9,506.25

Year 3: \$9,506.25 multiplied by 2.5%=\$237.66, \$9,506,.25-\$237.66=\$9,268.59

This process continues until 10 years of inflation are applied. While the inflation dollar value becomes lower with each passing year, so to does the value of the initial amount of money. Eventually, after 10 years of inflation, what was once worth \$10,000.00 becomes \$7,763.29 or close to 25% less than the original worth of the money.

Incorporating inflation into financial planning:

As the previous section illustrates, inflation can have a dramatic influence on the value of money over a relatively short period of time. Prudent financial planning will take into account the cost of inflation when obtaining savings and investment yields and even cost management. There are several ways to incorporate inflation rates into financial planning. For example, some investments are automatically adjusted for inflation. For investments that aren’t obtaining a yield higher than inflation and then adjusting the future value of the money for inflation ideally adjust for inflation. The following is a list of ways to incorporate inflation rates into financial planning.