Did you know that earning more doesn’t always equal buying more? The real value of your money depends on something else: your purchasing power. This concept is essential for understanding why you could fill up your grocery cart yesterday, but get far less with the same amount today.
Curious?
Then take note—because today you’ll learn what purchasing power is, how to measure it, and, most importantly, what you can do to protect it against factors like inflation or financial crises.
It’s the amount of goods and services you can buy with a certain sum of money, given current market prices. Put simply, it tells you how far your money goes based on the cost of products and services at a given moment. That’s why it’s also known as spending power or buying power, since it depends on both how much money you have and the prevailing prices.
Inflation is when those goods and services continuously rise in price. As a result, the currency’s purchasing power takes a hit.
Broadly speaking, this happens because of two main reasons:
1. Excess money in circulation. If more money is printed than what the country’s production can back, its currency loses value. Thus, you’d need more money to buy the same items.
2. Lack of economic trust. When people or businesses pull their money out of the banking system, that money circulates less. In turn, prices can rise just from speculation—while wages fail to catch up.
Both inflation and hyperinflation are some of the reasons why certain countries end up with the cheapest currency in the world, weakening both residents’ purchasing power and the nation’s overall economy.
While closely related, salary and purchasing power are different concepts.
Salary: The amount you’re paid for your job. It’s just the numeric figure you receive, not factoring in market prices.
Purchasing power: How much you can buy with that salary.
Ideally, once you figure out your gross and net salary, it should at least cover basic necessities and maintain your standard of living. But if prices go up while your earnings don’t, your ability to buy dwindles.
Let’s assume you have a monthly salary of 15,000 MXN, translating to around 500 MXN in daily integrated pay. You spend 4,000 MXN a month for your basic groceries. But at some point, food prices suddenly spike due to inflation.
Now, that same grocery list might cost you an extra day’s salary—about 4,500 MXN. If you stick to 4,000 MXN, you’ll end up with fewer products in your cart.
A simple formula for computing your purchasing power is:
Purchasing Power = Nominal Income / Consumer Price Index (CPI).
Nominal Income: Your total income (for a household or individual) unadjusted for inflation.
CPI (Consumer Price Index): Tracks price changes for a basic basket of goods and services over a specific timeframe.
Returning to the above scenario, assume the CPI was 100 before the price jump. With a 15,000 MXN monthly salary, the initial purchasing power would be:
Initial purchasing power = 15,000 MXN / 100 = 150.
After prices rise and the CPI goes up to 115, your purchasing power goes down:
New purchasing power = 15,000 MXN / 115 = 130.
Although your monthly salary of 15,000 MXN stays the same, it now covers less.
Additional Data:
The CPI in Mexico has been steadily increasing over the past years. According to Statista data, in September 2024 it reached 136.08 points, nearly 6 points more compared to the same month the previous year. Meanwhile, INEGI reported an annual inflation rate of 4.55% in November 2024.
These figures demonstrate how a continuous increase in the CPI and inflation cut into Mexican consumers’ purchasing power.
Having a high income doesn’t necessarily mean you have high purchasing power, as seen in countries with the world’s strongest currencies where prices are also steeper. Still, there are tactics you can adopt to optimize your money.
Let’s take a look at 4 practical tips for maximizing your finances and shielding your buying power:
Leaving your money in a checking account without earning returns results in a real loss over time. It’s key to look into options that let your money grow or at least retain its real worth.
If you’re ready to take on slightly more risk, mutual funds can be a powerful way to grow your money. By planning long-term and seeking good advice, you can preserve or even increase your purchasing power. As part of that, you might consider index funds, which require minimal active management and offer strong return potential.
Reviewing your monthly outlays is essential to ensure expenses don’t climb faster than income. An effective method is listing your priorities, then trimming unnecessary expenditures.
For instance, see if there are cheaper providers for utilities, and don’t be afraid to switch if that helps you save. Small, regular tweaks like these help you sock away a bit more each month.
Consider setting aside part of your savings in a digital dollar account, such as the one offered by DolarApp. It’s an innovative solution that can help stabilize your money’s value against local market fluctuations.
In short, guarding your purchasing power isn’t just about earning more—it’s about making smart choices with the money you already have. Balancing spending, investing, and the use of helpful tools like DolarApp can strengthen your financial security over the long haul.
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