Today's dollars

Thanks to inflation, today’s dollar doesn’t stretch as far as you might think it should.

Inflation is the rate at which the prices of goods and services increase over time. The effect of this is to reduce the purchasing power of money.

For example, a handy calculator on the Reserve Bank website shows how many dollars you would need now to buy a ‘basket’ of goods and services in years gone by.

• In 2005, what you could buy for $1 would cost $1.09 now* 
• In 1995, what you could buy for $1 would cost $1.31 now*
• In 1985, what you could buy for $1 would cost $2.39 now*
• In 1975, what you could buy for $1 would cost $8.41 now*

On Sorted, we use ‘today’s dollars’ to show this loss of the dollar’s buying power over time.

Say you wanted to work out the total cost of borrowing $10,000 over ten years at 10% interest pa, with monthly repayments. The actual dollar amount that you will have paid in principal and interest over the term of the loan would be $15,858.09. (This is called ‘nominal’ dollars, and is how some banks and financial institutions choose to display their calculations.)

However, thanks to inflation, $15,858.09 paid over the ten year term of the loan won’t have the same buying power as $15,858.09 today. So to make things more meaningful, we prefer to show amounts in today’s dollars – these are nominal dollars adjusted for the effects of inflation.

Using today’s dollars, our Get into debt calculator shows the total cost of the ten-year loan as $14,374.77 – because we estimate (at an inflation rate of 2% each year) that $15,858.09 of nominal dollars paid over the ten year period would only have the purchasing power of $14,374.77 at the start of the loan.

The actual dollar amounts that you pay or receive are likely to be more than the figures we show, but they will have the same current buying power.

*Amounts calculated using 2007 today’s dollars