The Invisible Tax
No bill, but paid annually
Most taxes are obvious — you see them as deductions from your paycheck or as line items on a bill. But there’s another tax that quietly erodes your money, even when the balance in your account doesn’t go down.
You’ve probably heard the term inflation, which means an increase in the prices you pay for things. As costs like labor, rent, and supplies rise over time, businesses raise prices so the people running them can continue to make a living.
Let’s say Tony owns a local pizzeria and makes just enough from it to pay his personal bills. If the cost of cheese and sauce rises, his rent goes up, and his employees earn higher wages, Tony has to raise his prices too — not to get richer, but simply to keep making a living.
That’s how you might end up paying $21 for a pizza this year even though the same pizza cost $20 last year.
Economists use the term purchasing power to describe how much your money can buy. When prices rise, that purchasing power falls.
Even if the number in your bank account stays the same, inflation quietly reduces what that money can buy. That’s why it can feel like a tax — one you pay every year without ever receiving a bill.
Every good or service has its own inflation rate. Some prices rise quickly, while others change very little. Because people spend money differently, each of us effectively experiences our own personal inflation rate.
The government publishes a single official inflation number based on what it believes represents a typical household. But in reality, inflation affects everyone a little differently.
Inflation is why simply putting money under a mattress — or its modern equivalent, a checking or savings account — isn’t enough. To preserve purchasing power, your savings and investments must grow at least as quickly as your personal inflation rate.
Let’s say your personal inflation rate is 2.5% per year.
If your salary rises by 2.5%, then your income is roughly keeping pace with inflation — before taxes.
If you earn 0% in a checking account (ignoring any fees), then next year your money will buy 2.5% less than it does today.
If you earn 2.5% in an online savings account, then your money will buy about the same amount next year.
If your investments earn 9%, then your purchasing power increases by about 6.5%.
In other words, whether your money grows or shrinks depends on how it grows relative to inflation.