Inflation causes things to cost more, and for our money to buy less (hence your grandparents saying “In my day, you could buy a cup of coffee for a nickel”). Suppose inflation decreases the value of money by 2% each year. In other words, if you have $1 this year, next year it will only buy you $0.98 worth of stuff. How much will $100 buy you in 20 years?
If inflation decreases the value of money by 2% each year, it means that the value of money is reduced by 2% annually. Therefore, in 20 years, the value of money will be reduced by 2% x 20 = <<2*20=40>>40%.
This means that $100 will only be able to buy 100% - 40% = 60% of its original value in 20 years.
Therefore, $100 will be able to buy $100 x 60% = $<<100*60*.01=60>>60 worth of stuff in 20 years.
To calculate how much $100 will buy you in 20 years, considering a 2% annual inflation rate, you can use the formula for compound interest:
Future Value = Present Value * (1 - Inflation Rate)^Number of Years
In this case, the present value is $100, the inflation rate is 2%, and the number of years is 20. Let's calculate it step-by-step:
Step 1: Calculate the inflation factor
Inflation factor = 1 - (Inflation Rate / 100)
= 1 - (2 / 100)
= 1 - 0.02
= 0.98
Step 2: Calculate the future value
Future Value = Present Value * Inflation Factor^Number of Years
= $100 * 0.98^20
Now, let's calculate this:
Future Value = $100 * 0.98^20
≈ $100 * 0.6727
≈ $67.27
Therefore, $100 will buy you approximately $67.27 worth of stuff in 20 years, considering a 2% annual inflation rate.