If you’ve been keeping up with financial news, you’ve likely come across the term ‘inflation’ quite often. But what exactly is it, and why should you be concerned about it, especially regarding your savings? Understanding this now is crucial for your financial future.
Inflation affects everyone, whether you are just starting your career, about to retire, or saving money for a rainy day. Inflation slowly devalues your cash. In the future, the money you have saved will not go as far. Let’s talk about rising prices, how they can affect your savings, and what you can do to protect your money.
What is inflation?
Inflation is a situation where, over time, the prices of things we buy go up. While this is a regular part of the economy, it can be a problem for people who save money if it happens too quickly.
Imagine five years ago, you paid $1 for a cup of coffee. You now need $1.50 for the cup. That fifty cents is inflationary earnings. Your money will be worth less today than yesterday if your savings did not grow over those five years. The problem is that as prices go up, your money can’t buy as much as it used to.
Inflation’s Impact on Your Savings
Most importantly, you need to realize that inflation erodes the buying power of your money over time. Should you leave your cash in a savings account—or under your bed, for that matter—odds are it will lose value over time.
Say you currently have $10,000 in the bank, and yearly inflation is 3%, for example. Your $10,000 will buy only around $7,400 worth of goods in ten years. Your funds do not go as far; you lost no actual money.
Low interest rates worsen it
Most savings accounts do indeed pay interest, but usually not beyond inflation. If inflation is 3% and you earn 1% from your bank, you lose 2% yearly. Even in the best-yielding savings account, matching inflation just on interest is challenging.
This is especially true in times of rising inflation when prices increase, but bank rates lag. Your savings accumulate just slightly but hardly at the rate of the rising cost of living.
The Influence on Low-Return Investments
Most people have money tied in low-return investments like bonds or certificates of deposit (CDs). These investments are also susceptible to the worst consequences of inflation as they return cash continuously.
Let’s say you invest in a bond that gives you 2% interest every year. As inflation rises to 4%, your purchasing ability falls. Inflation does not automatically change fixed-income investments; their buying power declines as prices rise.
How to Shield Your Savings from Inflation
The good news is that you can avoid letting inflation deplete your savings. You may enable money development and match inflation with the correct approach and good planning.
Buy stocks
Stocks are a powerful tool against inflation. Over time, the stock market has usually grown faster than inflation. While stock values may fluctuate in the short term, they rise as companies grow and generate more revenue, offering a promising outlook for your financial future.
Investing in stocks or stock-based mutual funds lets your money rise faster than inflation. This helps you keep your money’s value or even grow it.
Put your money in investments that are protected from rising prices
The U.S. government issues TIPS or Treasury Inflation-Protected Securities. Your investment will maintain its real worth over the long term since a TIPS bond appreciates during inflation.
TIPS are not the most significant return; if you don’t want to wait to take a lot of risks to protect your assets from inflation, they are a lock.
Broaden your portfolio
Another excellent approach to protect against inflation risk is to spread your assets. You spread your money across different types of investments, like:
Real estate; commodities like gold or oil; bonds; stocks.
Every asset reacts differently to inflation. For example, commodities and real estate gain value as inflation rates grow. Diversifying reduces the odds of any component of your portfolio underperforming during inflation.
Put money in yourself
It could be counterintuitive, but investing in yourself, your career, and your skills also helps to insulate you from inflation. As people start earning more, their standard of living also goes up. The better you can keep your pay in line with inflation, the more valuable you will be as a resource to the labor market.
Don’t Rely on Cash Only
Although it’s always a good idea to have cash for unplanned purchases, don’t maintain too much cash or low-interest money in your accounts. Inflation will progressively lessen the buying power of inactive cash, as we have discovered. Instead, counterbalance liquid savings with long-term investments that might exceed inflation. Stay Informed and Adapt as Necessary
Inflation is a dynamic force, sometimes low, sometimes high. The key is to be adaptable and keep pace. Check your investments at least once a year and make changes if needed.
If inflation rises, consider allocating more funds to assets that can beat inflation or have longer-term growth potential. This adaptability puts you in control of your financial future.
Though it may seem like nothing more than an economic catchphrase, inflation physically affects your money over time. Understanding how inflation affects your money will help you to make wise choices that will shield your financial future.
Don’t let inflation catch up with you; act now and set up a savings and investment plan running in line with—or better yet ahead— the rising cost of living.
