How much has the dollar shrunk since you were born?
It is hard intuitively to realize how big the effects of compound interest are over long periods of time, whether it is making something get bigger or smaller. In this case, it means how much average prices are multiplying and how much the dollar is shrinking.
The following table simply shows the Consumer Price Index over seven decades, starting with 1946. For each year, it calculates how many times average prices have multiplied from then to now, and how many cents were then equivalent to one 2017 dollar. For example, in 1948, I was in kindergarten. Since then, prices have multiplied by a factor of 10 times. Today’s $1 is worth what $0.10 was then. Taking another example, in 1965, I graduated from college and luckily met my future wife. Prices have since multiplied 7.8 times. And so on.
You may find it interesting to pick a year—say the year you were born, graduated from high school, first got a regular paycheck, got married or bought a house—and see how much average prices have multiplied since. Next, see how many cents it took at that point to have the equivalent purchasing power of $1 now. In my experience, most people find these numbers surprising, including the changes from more recent times – say, the year 2000. They become inspired to start remembering individual prices of things at various stages of their own lives.
Multiplying Prices and the Shrinking Dollar over Time, 1946-2017
You can also project the table into the future and see what will happen if the future is like the past.
Since average prices can go up over 10 times in the course of an single lifetime—as the table shows they, in fact, have—it is easy to see one reason it is hard to generate sufficient savings for retirement. You have to finance paying what prices will be in the future when you are retired. In the last 40 years (see 1977 on the table), average prices have quadrupled. Then, $0.25 bought what $1 does now. So if you are 40 years old now, by the time you are 80, prices would quadruple again. Good luck with your 401(k)!
Image by forestpath