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December 14, 2010

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According to inflation calculator there has been 178% inflation between 1980 and 2010. My age 28 => 28,000 * (1+1.78) = 77,840

Not quite there yet. Much closer to twice my age. Does that make me a loser? Or have real wages fallen?

Going from Oct 1981 to Oct 2010 results in inflation being 134.17% instead of 157.91% (Oct 1980) which shows that if the advice originated even one year later the amount would be drastically different.

28,000 * ( 1 + 1.3417) = 65,567.6 - over $10,000 less

Data: http://www.inflationdata.com/inflation/Inflation_Calculators/Inflation_Calculator.asp

There was about 10% inflation from 1980 to 1981.

Different inflation calculators will give different results. THe calculator at bls.gov says that $1 in 1980 is worth $2.65 in 2010. Going from year to year rather than specific month to specific month will give different results too.

I missed the part about why anyone "needs" an age-based rule on either income or spending? The point of such a rule would be....what, exactly?

Earn my age? Heck, I am lucky to act my age, if you ask my wife.

I had heard this old chestnut many years ago, when I was making far less than my age. I took it to heart as a young man. College, good work ethic and a bit of luck changed that many years ago. Now I strive to earn my dad's age.

I think the author is grasping at straws. This is a terrible generalization and I would expect it to be really limited in it's application. As MC points out - why do we need an aged based rule exactly?

The age old addage (repeated on this blog at least daily) spend less than you earn is the only broad based generalization I think that's worth making. It doesn't discriminate your age or your income.

Re: spending your age... what about a family? Does it suggest adding our three ages and spending a total of that? If so, we're pretty close but having two adults sharing costs would seem to be pretty harsh on singles.

In the end, spending your age may not be that extreme, especially in some parts of the country. In NYC where I work (and we live right outside of NYC where there is little cost of living difference other than city tax and some extra space) it's pretty tough for sure.

I'm with The Real JZ on "spend less than you earn" being the only generalizable rule that makes sense here. Sadly, I'm also with David C on (maybe, on a good day) acting my age, and definitely not anywhere near earning 2X my age. Yet.

Really though, the problem with "spend your age or less" is that it ignores the other half of the equation. How much you bring in.

Beware online inflation calculators, even those based on BLS statistics. They don't measure what you think they measure.

If you're trying to compare your purchasing power to that of someone in 1980, you need to compare how much stuff each of you could buy. BLS statistics do this by comparing how many "baskets" of goods you could buy year-to-year, but the basket keeps getting bigger -- so, for example, JoeB's "$77,840" is supposedly the inflation-adjusted amount for $28,000, because they'd buy the same number of baskets of goods, but the 2010 baskets have a lot more and better stuff in them. You have to deflate the basket back to the same size as before in order to make a true comparison.

Lotharbot, its not as if the numbers go up just cause people buy more stuff. That is what it sounds like you're implying.

If I add mine and my husband's age, we spend less than we 'are'. I will say though that those kiddos tend to increase the expenses!

Have to say, I'm not sure about this age-based rule. To me, income and expenses are different for everyone based on education, personal expectations, geographic location, etc. A one size fits all approach doesn't seem too practical - at least not this one.

I think it all goes back to the idea of focusing on growing one's income and protect said income stream, while concurrently maintaining a low level of expenses. Maximizing that income minus expense gap, and intelligently/strategically investing the savings, is the main idea in my view. How one gets there depends on each person's personal situation.

I make more than my grandfather's age.

Interesting! I've never heard of this rule. It wouldn't apply to me though, as I went back to school and started a new career. I don't make as much as my cohorts who stuck with one job, but I love what I do. I certainly earn more and spend less than my age, but with inflation it's kind of a moot point.

jim, no, that's not what I'm saying.

What I'm saying is that the standard way of measuring inflation is misleading. The measurement is basically: how many dollars today does it take to buy the stuff on the BLS list, vs how many dollars it took in some other year to buy that year's BLS list. Since the stuff on the BLS list changes year to year, what they actually end up measuring is a combination of *monetary inflation* with *lifestyle inflation*. In other words, *part* of the increase is due to people buying more stuff, while most of it is due to actual inflation.

This means, if you're trying to make a comparison with 1980 dollars, you can't use their statistic directly. You have to account for the fact that they keep changing exactly what's being measured.

@LotharBot - yes, but what if i really really want to buy a VCR in 2010? :)

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