How To Keep Inflation From Destroying Your Savings

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By Guest writer Cristina Beltran

As mentioned in ‘8 Economic Indicators you MUST understand’, inflation is the rise in the general price of goods and services in the economy over a period of time. A positive inflation means goods have become more expensive. However what happens if your income stays the same or grows at a lower rate than inflation? Well, your purchasing power decreases. Which means a dollar will buy you less goods than it did the year before. The situation is even worse when you account for taxes. So unless the net income you receive from your wage, your pension and your investments increases at a sufficient rate, you will not be able to build actual wealth. The depreciation of money over time due to inflation is inherent to the fiat monetary system. Therefore over the long run, the value of your money is doomed to fall. So what should you do to maintain your purchasing power and build wealth?

Invest In The Right Financial Instruments

Since the 2008 financial crisis, central banks have been keeping interest rates at a very low level (close to 0%). This means your savings accounts and government bonds have been yielding a very low return. For instance, the 2013 average inflation in the U.S. was 1.5%, which is also the present rate at the time of this article. Based on money-rates.com, the best annual interest you can get from a bank savings account is presently 0.9%. So you can stack your cash in the bank as much as you’d like, you would still be losing purchasing power every day. Similarly, if your financial planner places your money in 2-year U.S. government bonds, your annual yield will be less than 0.5%. As a matter of fact, your portfolio may even experience a negative performance because of management fees charged to your investment account. So to avoid this situation, you have to invest in asset classes that yield a return higher than the inflation plus taxes and management fees combined. Read ‘investing your money wisely’ to see the options available to you as a function of your investor profile, and then talk to your financial advisor.

Conclusion

While trying to beat inflation, you will probably be tempted to invest in more rewarding assets. However keep in mind that the best paying investments also tend to be the riskiest (e.g. equity, commodity), the most illiquid (e.g. real estate) and the longest (long term). Click here to read more on how inflation impacts your savings.

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