38–Lever #3: Spending (Part Seven–Inflation and Your FLE)
Inflation affects almost everything in your FLE
Inflation is a ”silent enemy” because it does not always appear like a flashing red alert.
It often creeps in quietly, but its effects can be huge, especially over the long term and, in extraordinary cases, in the short and medium term.
According to the Federal Reserve Bank of Minneapolis, as of April 2025, the cumulative inflation in the United States since January 2021 is approximately 21.3%, based on the Consumer Price Index (CPI). This means that, on average, prices have increased by over 21% during this period. Here’s the year-by-year increase.
2021: 4.7%
2022: 8.0% (yikes!)
2023: 4.1%
2024: 2.9%
You may remember that we discussed the “compounding” effects of inflation in the previous article, which we might call “cumulative” inflation. To compute cumulative inflation over multiple years (in this case, 2021 through 2024), we can use the compound formula:
Inflation is more than a simple formula; it hits us hard in our pocketbooks and wallets. A product that cost $100 in January 2021 would now cost about $121.30 in April 2025, reflecting the cumulative inflation over this period. (If you're interested in calculating how inflation has affected specific amounts over time, you can use the BLS CPI Inflation Calculator.)
Inflation is not part of our Financial Life Equation (FLE), but it can significantly impact it. It’s more of an economic condition affecting almost all FLE components rather than an individual one.
Wt+1 = Wt + ∑It+1 –∑Tt+1–∑Gt+1–∑Et+1+ ∑IEt+1–∑IPt+1
In the FLE, all amounts are in nominal dollars, meaning non-inflation-adjusted dollars. To adjust for inflation, we need to focus on real values—what your income and interest are worth in today’s dollars.
To illustrate, let’s assume:
Annual income: $60,000
Annual interest earned: $3,000 (from a 5% return on investments)
Time horizon: 10 years
Inflation: 0%, 2%, and 4% scenarios for comparison
We’ll keep things simple by assuming constant income and interest (no raises or compounding yet).
Note that at 4% inflation, your total income loses nearly $115,000 in purchasing power over 10 years, and interest earnings lose almost $6,000 in real value. Let that sink in a bit. If you’re saving for the future, inflation quietly chips away at your progress. And the higher the inflation rate, the faster it happens.
Future wealth will decline as rising expenses and interest paid outpace income growth and interest earned. The problem is that real income and interest earned aren’t keeping up with the compounding effects of inflation on expenses and interest paid. Expenses like taxes, giving, and spending naturally rise with inflation. Interest earned on savings often lags inflation, especially if you have the money in low-yield accounts. Interest paid on fixed-rate debt stays the same, but its relative burden may decrease in real terms.
What does all this mean? You must count the cost (Luke 14:28). Not every dollar earned will be worth the same in the future. And things you buy in the future will require more of today’s dollars to purchase. Wise stewards understand how time and inflation impact their finances and specific decisions. For example, an income of $60,000 per year with no annual increases would buy approximately $51,757 worth of goods and services in five years, resulting in a loss of purchasing power of over $8,200.
For reflection:
Do you consider inflation in any of your financial decisions or long-term planning? Consider how “real” your income, savings, and spending are in today’s dollars. As a steward of what God has entrusted to you, are you preparing not just for today, but for how far your resources may—or may not—go in the future?
Verse:
“Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it” (Proverbs 21:20, ESV).