Everybody goes round worrying about inflation but few pay a lot of attention to
inflation and the effects that it has on their saving. They assert that owing
to inflation, the value of money decreases gradually and therefore the amount
of money you have now will not buy as many goods as they would now. In this
post, I will dissect how inflation works against your money’s value and what
you can do about it to shield or even grow your freed-up wealth.
What is Inflation?
Inflation is the general rise in the price level of goods and services within a
given economy over a certain period thus a decline on the purchasing power of
money. On the other hand; low and slow inflation is considered healthy for the
economic environment but high or fluctuating inflation a cause for concern for
savers.
How Inflation Impacts Your Savings
This is because inflation sees your money lose its value with time owing to the
fact that the purchasing power you held earlier reduces as inflation goes up.
Let’s assume that inflation is at 3%, while your savings account pays only 1%,
you’re technically losing 2% of your buying power every year. In the long-run,
this is able to greatly reduce the purchasing power of your own efforts to earn
money.
Inflation and Interest Rates
Economic interest rates of normal saving accounts are generally below the
inflation rates, therefore saving money in this traditional method means you
are accumulating some interest but not enough to cater for the increasing
prices. This inflation rate disparity of above average and rising interest
rates means you may be losing money in real terms.
Protecting Your Savings from
Inflation
With inflation as a reality that cannot be avoided it is necessary to search
for avenues to make your money grow at a rate that will counter inflation. Here
are few suggestions that could be followed, in the next section:
Investing in Stocks and Bonds: Generally, the performance of stocks in the stock
market has been higher than inflation in the long-run hence investing in
stocks is ideal, for the long-run. Other examples include bonds, mainly
those with the inflationary hedge such as the TIPS.
Real Estate Investments: Real estate, generally, is a medium that usually gets
more expensive with time and this makes it an inflation hedge.
Commodities and Precious Metals: Gold, silver and other commodities are great
investments to be made in an inflationary economy.
High-Interest Savings Accounts or CDs: Most of the banks have interest bearing savings
accounts or special savings accounts known as CDs that can be used to
minimise the impacts of inflation to an extent.
Inflation-Proofing Your Budget
Besides, protecting one’s savings besides controlling inflation is a factor
that ensures one’s everyday expenditure is also stable. Consider:
Cutting Non-Essential Expenses: Thus, one need to cut away the unnecessary expenses to
be able to continue running a sustainable operation as prices increase.
Shopping for Deals:
During inflation you need to keep an eye on inflation and look for better
discounts or look for cheaper substitutes to cut on your expenses.
Reviewing Your Financial Plan: It is crucial that people always cheque where they are
with their financial goals and cheque their budget or savings plans so
that even with inflation one is not affected.
The Importance of Diversification
Asset diversification to sources of inflation is important in the process of
avoiding high risks of inflation. This is because the nature of investments
should not be fixed on one location like stocks or only on bonds or just
property, but should also include stocks, bonds and property and even
commodities among others in order to diversify the risks and increase the rate
of return above inflation.
While inflation is often chronic, you are also not helpless; there are things
you can do to shield your money. Thus, keeping yourself up to date, investing
across different classes, and practising good financial management skills are
ways in which you could make your money work, in an inflation era. Aluta
continua? Remember, to wait until this inflation gobbles up all your wealth, in
the distant future is not a good idea at all.
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