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Renting and Inflation

When you're in your 20s or 30s, you may not now be thinking or caring about your golden years, but look what will happen to your rent over the decades ahead with just modest inflation! Then remember that paying $750 rent per month now is the equivalent of buying a home for $150,000. Well, in 40 years with 4 percent inflation per year, your $750 per month rent will balloon to $3,600 per month. That's like buying a house for $720,000!

Although the cost of purchasing a home generally increases over the years, once you purchase a particular home, the bulk of your housing costs are not exposed to inflation -- if you use a fixed-rate mortgage to finance the purchase. Therefore, the comparatively smaller property taxes, insurance, and maintenance expenses are the only housing costs you will have that will increase over time with inflation.

Even if you must stretch a little to buy a home today, in the decades ahead, you should be glad that you did. The financial danger with renting long term is that all of your housing costs (rent) will increase with inflation over time. We're not saying that everyone should buy because of inflation, but we are suggesting that, if you're not going to buy, you should be careful to plan your finances accordingly.