How Inflation Impacts your Savings
October 23, 2020
By Rahul Iyer
While investing is important to the process of wealth creation, saving should never be neglected. Many got involved in investing as a result of how disciplined they were at saving. Saving is also essential to maintaining an emergency fund that will support you during times of financial instability.
One of your saving account’s gravest enemies is inflation. Inflation is when the average prices in the marketplace go up. This affects the value of the money you have stored up.
If a product costs $200 and the inflation rate is 3%, the same product will cost $206 next year. Inflation impacts almost all our typical expenditure. This means that if you put away $30,000 this year it will likely value very little in the next 30 years. So, while you are not directly losing money, the value of your savings is going down because inflation is eating away at your ability to purchase products and services.
How to Plan for Inflation
The best way to counter the effects of inflation is to place your money in investments that offer an interest rate that is higher than the inflation rate. Investment vehicles such as stocks or mutual funds typically grow your money at a pace that makes nullifies the impact of inflation while increasing the value of your funds.
Certain forms of investments can be negatively impacted by inflation. Investments such as standard bonds or bank certificates of deposit feature a set annual return. Let us say the annual payment from one of these vehicles is $200. As inflation impacts the economy, the value of this $200 pay-out will reduce every year.
Do not Invest Emergency Money
While we believe you should plan for inflation, we do not encourage you to place your emergency money into investments. Emergency funds should always be kept as liquid as possible so that you can access it when you are faced with an urgent financial challenge.
Saving should always be done in the context of a financial goal; however, you must bear in mind that long-term saving will face the negative impact of inflation. As mentioned above, if you place your money in vehicles that will grow your money in a way that guards you against the effects of inflation, you are in a great position. Ensure that the vehicles that you choose to use in your endeavors to beat inflation are stable and are approached with financial intelligence and sound financial counsel.
We all must deal with inflation. It is one of those realities that we may be tempted to argue over, but it would be more beneficial for us to use that energy to come up with strategies to grow our money at such a pace that we do not have to worry about the effects of inflation.