Purchasing power and its relationship with inflation

Having different financial assets allows you to buy more products and services, improving your quality of life and reaching your goals. Therefore, to achieve it, it is key to maintain good purchasing power. What does it consist of? How is it determined? What can you do to improve it? We will tell you.

It is the quantity of goods or services you can access with the money you have, according to current market prices. To calculate it, several factors are taken into account:

• The goods in your name (housing, car, etc.).
• Your purchasing capacity and the limits of your credit cards.
• Liquidity ease, that is, whether with your goods or investments you can quickly access cash.
• Capital in your bank account, pending collections and investments; for example, shares or cryptocurrencies. In this sense, your salary may be part of the money you have available, but it does not necessarily determine your consumption capacity.

Differences between salary and purchasing power

Perhaps you did not know it, but your purchasing power does not directly depend on your salary. The latter is the amount of money you receive each month as payment for your work. However, it is not the only factor that determines how many goods or services you can buy.

For example, if you make investments or create a business, it is likely that, over time, you will have greater buying capacity. Also, if you spend less and manage to save, you will be able to acquire other goods later. Similarly, if you obtain any good or asset with a credit card and pay it in installments. Finally, it is important to keep in mind that inflation plays an important role in your consumption.

What influence does inflation have?

This phenomenon directly impacts your purchasing power. Inflation is the increase in the price of goods and services within a country over a prolonged period of time.

Consequently, with the same money you had before, you can buy fewer and fewer things. Thus, your consumption capacity is progressively reduced. You are forced to generate more income to compensate for price increases or to reduce your lifestyle.

But what can you do to avoid it and continue to have access to the goods and services you need?

Tips to maintain good purchasing power

These are some basic recommendations to sustain and improve your consumption capacity, beyond the swings of the economy.

Make investments

An investment is an instrument that allows you to produce passive income. In other words, to make money while you are not working. How can you achieve it? By allocating capital to some asset that generates returns.

You have many options available; among them, stocks on the exchange, ETFs, cryptocurrencies, real estate crowdfunding or negotiable obligations. If you keep them over time, your capital will grow, improving your purchasing power.

Generate extra income

Your expenses are very likely to increase over time. An example would be if you decide to specialize in your career, start a family or buy your own home. In any of these cases, you will need to increase your capital to maintain the lifestyle you want.

One way to do this is to generate more income through different strategies. Among them, working extra hours, getting a second job on weekends, starting a business or selling the things you no longer use.

Improve your financial planning

Sometimes it is not about earning a huge amount of money, but about knowing how to manage it. Do you not know where your salary goes month to month? Do you feel you do not have enough control over your finances? Then, it is time to work on your financial planning.

To do this, you need to make a budget with percentages for fixed and variable expenses, savings and investments. Then, compare them with the amount of money you earn per month to know if you need to make adjustments or you can treat yourself.

Have smart debts to improve your purchasing power

Did you know that there are "good" debts? With sufficient financial education, you can use them in your favor to leverage yourself and reach your goals. These are some examples:

• Taking out a loan to acquire supplies and found a business that offers you good earnings.
• Managing a credit card intelligently to build your credit life. For example, paying your installments on time and taking advantage of the bank's benefits.
• Acquiring a loan to put capital into an investment, whose returns are higher than the monthly installments you pay.

In conclusion, increasing your purchasing power helps you protect yourself from inflation, stabilize economically and plan your future. Take these recommendations into account and apply them to get closer to your financial goals.

Bibliographic References

Becerra, L. (2022, December 22). Due to a difference of $62,300, the minimum wage increase has not yet been defined. Portafolio. https://www.portafolio.co/economia/finanzas/el-alza-del-minimo-por-que-no-se-ha-definido-575511

Vargas, N. (2022, August 11). Colombia is the eighth country with the most purchasing power per capita in Latin America. La República. https://www.larepublica.co/globoeconomia/colombia-es-el-octavo-pais-con-mas-poder-adquisitivo-per-capita-en-america-latina-3422492