Calculating the Value of Money Across Time

When you dig into your ancestors’ past, you will likely run across references to monetary values in their documents. You might find out what your ancestor paid for things like autos, homes, land, goods and services back in the day. The problem is, due to inflation, the value of money gets distorted over time. The value of money does not remain constant, nor does its value change in a predictable way.

The value of 10 dollars in 1920 is quite different than it is today. Ten bucks today will barely get you a cup of coffee and a bagel at Starbucks whereas ten bucks in 1920 was worth about $126.44. This article describes a practical way to adjust monetary values to “todays” values.

Real World Example

This may remind you of the word problems you worked in school, but let’s start with an example to illustrate the effects of inflation on money. Legendary investor Warren Buffet purchased his house in Omaha, Nebraska for $31,500 in 1958. The house is 6,570 sq. feet and has 5 bedrooms and 2.5 bathrooms, so it was quite a large house for the time in which it was purchased. The question is: was this a good buy for Warren?

What we need is a frame of reference to compare it against. My first thought was that my parents bought their first house in 1959 for about $12,000. But their house was much smaller in square footage, lot size and had only one bathroom. At least I now have something to compare the first property to, but what I really need is to compare the property against todays housing market by figuring out what the $31.5k investment translates to in today’s money.

I consulted an online inflation calculator at www.usinflationcalculator.com to find that the home purchased in 1958 costed approximately $275,635 in today’s dollars. Although this may seem like a lot of money, you could not reasonably expect to buy a comparable house in the same neighborhood for that money today. In fact, Buffet’s house has recently been appraised at $652,619. He claims his home purchase to be the "third-best investment he's ever made" and I tend to agree with him.

Value of Money Over Time

Inflation is defined as a general decrease in the purchasing power of money over time (prices keep rising for the goods we buy). Although we have come to expect about a 3% yearly rise in inflation, economic forces can create periods of deflation where prices for goods actually decrease. Just compare your weekly grocery bill 20 years ago to what you pay today to realize the impact of inflation on your budget.

The Consumer Price Index (CPI) was devised by the U.S. government to measure the impact of inflation from year to year. The CPI is calculated by examining the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is certainly not perfect, but it creates a standard measure of prices which can be compared across the years and is used in tools like the inflation calculator mentioned above to measure the value of money.

Another Example

According to Wikipedia, 10,666 Runabout Model-T cars were produced in the year 1909. The sticker price for such a car was $825 at the time. If your ancestor was lucky enough to buy a brand new one off the lot for that price, it required an investment approximately equivalent to $22,849 in today’s dollars.

While new cars in the $22k price range are rare today, thanks to advances in technology, you get a lot more car today than you would back then. Considering that even the most basic modern cars purchased today have standard features like power steering, power brakes, radio, air bags, backup cameras and the like not to mention are much more reliable.

Conclusion

The point to remember is, now that you can translate dollar amounts from long ago into today’s dollars, you can understand what that value of money really means. The next time you come across an old family document with a dollar value in it, take a few minutes to punch a few numbers into an online inflation calculator and get an inflation adjusted estimate.

Inflation calculators are readily available on the Internet: just do a Google search for “inflation calculator” to locate one. We all live in today’s world, so converting to “todays” money remains the best way to crack the code on these old dollar values.

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