There is an extremely important concept that concerns the value of a dollar today versus tomorrow. Over time, inflation erodes the worth of money, so that a given amount buys less in the future than it can today. When inflation is high, it erodes purchasing power, meaning your income must be greater to keep pace with rising prices and maintain a desirable lifestyle. The opposite is also true: A low-inflation environment, like the current one, puts less pressure on income.
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Consequently, you want your sources of income to regularly exceed, or at least keep pace with, the rate of inflation—something the S&P 500 has been doing for the better part of five years.
Investors who hold cash or cash equivalents should not feel comfortable. They may have opted for a less riskier short-term investment, but have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value over the long-term.
When you are planning for the future, you are examining dollars over numerous time periods. To compare them, you need to put them on an equal purchasing-power footing, so they are all in equivalent dollar terms.
One approach, the equal footing will be the purchasing power of today’s dollars—that is, dollar amounts will always be stated in terms of today’s dollar equivalent.