How Prices Increase Annually

How Prices Increase Annually

**February 7, 2018**

**By: Mason Gallik**

Throughout the LoanMajor site, you may see several boxes called “Increase Annually” that ask for a number with a percentage sign. If you do not know what this is, this article is here to explain to you Increase Annually. This box can be a powerful tool so you do not underestimate future costs or your future salary!

The Increase Annually box is just like inflation. For example, Brett is about to enroll in college and tuition is $20,000. Brett may think that this price will be the same all four years, but that is not often the case. College prices often *increase annually*, so the price is often higher in Brett’s second, third and fourth years.

A very simple example is the cost of a loaf of bread. Let’s say in 1930 a loaf of bread costs 10 cents and in 2018 it costs $2.50. The price of a loaf of bread had to be *increasing annually* because it has gone up $2.40 since 1930. From 1930 to 2018, the price of a loaf of bread has *increased annually *by about 3.73%.

$0.10 x (1 + 0.0373)^{88} = $2.51

This formula basically means if you multiple $0.10 by 1.0373 (the rate it is increasing) 88 times you will get $2.51. You are probably thinking bread is great and all, but what does that have to do with my starting salary or cost of college?

Back to Brett, say the cost of his college has been rising by about 4% each year. For his second year, it will cost:

$20,000 x (1 + 0.04) = $20,800

This is an $800 increase that Brett will have to pay next year! For his third year, you start with the $20,800:

$20,800 x (1 + 0.04) = $21,632

Repeat again for the fourth year:

$21,632 x (1 + 0.04) = $22,497

By the fourth year, Brett’s college will be costing $2,497 more than it originally did! This is a demonstration of compounding because it is increasing on top of the previous year’s increase. It can also work in your favor though since wages usually increase annually each year as well. Accountants were making on average of $45,304 in 2016. Say Brett was an accounting major and he thinks their starting salary is going to increase by 3% each year while he is in college. The data from Starting Salaries is from 2016 so when he graduates in 2022, 6 years will have passed.

$45,304 x (1 + 0.03)^{6} = $54,095

Brett’s starting salary will probably be around $54,095 or a $8,791 increase from current levels!

As you can see, the Increase Annually option is a very powerful tool since prices usually increase every year. These can be good prices (like your salary) or bad prices (like the cost of college). However, this will help you get a more accurate view of your situation, instead of assuming prices stay the same each year.