Is the title overdramatic? Perhaps, but inflation is the reason many communities are in such dire financial straits, it’s silent, invisible and hits your pocket book right when you least expect it. The community that has been saving for a roof replacement for twenty four years but doesn’t tackle this silent assassin will find out they only have half the amount needed to replace the roof – slice...inflation…
What is Inflation?
Inflation is the reduction in your purchasing power over time which causes prices to increase. It’s the main reason why your house is worth more, the car you drive is more expensive and a candy bar is double the price it was when you were a kid. There are numerous reasons inflation has taken a strong hold in our economy for over 100 years, from the printing of money to demand fluctuations and productions prices but the ends result is a higher costs to us. Apart from very short periods of time over the past 100 years this shadowy figure has remained a force to be reckoned with.
Impact of Inflation
If nothing else is taken from this post, take away that construction costs have increased for over 100 years due to inflation and it’s unlikely it will be stopping anytime soon. With this in mind let’s look at a real world scenario for the impact of inflation.
A community budgeting for the eventual replacement of a roof can expect the cost of the roof to double every 23.5 years, this is based on a 3% annual inflation rate. So a community which saves but doesn’t take it into account will end up with approximately half the amount saved at 23-24 years. Even a community that saves and takes into account a 3% inflation rate but forgets this silent assassin’s best kept secret (compounding inflation) will find itself significantly underfunded at the end of 24 years.
Plan of Attack!
Let’s be honest unless you have the fortitude of Chuck Norris it’s unlikely you’ll be able to handle a silent, invisible and never relenting opponent. The best way to win this battle is to not fight it at all. Accept that it’s not going anywhere so you might as well pull up an extra seat and figure out how you and inflation can work together to create a viable budgeting plan for your HOA community.
The simplest, fairest and most stable approach is to increase the allocation amount to the reserve account by an amount equal to the inflation rate thereby neutralizing this threat. This means increasing the reserve allocation rate by 3% per year which will likely require annual increases to the HOA dues as well. Now this is inflation’s second most potent weapon– the power of suggestion – suggesting that inflation doesn’t exist, suggesting inflation is taking a break, suggesting iinflation may pass your community over – checkmate inflation.
So we’ve learned not to fight inflation but accept it into our lives, plan for it and make sure we don't ignore it. That’s how inflation is handled. Maybe we just need to come at this from a different frame of mind as well. You see inflation is not all bad… The same inflation that is causing the costs of construction to rise in your community is also causing your home values to increase at a pretty regular and steady pace for over 100 years (save for a few relatively short periods). Everyone loves increasing home prices so let’s take that enthusiasm and squash inflation's darker side.