Last year we saw inflation rates go above and beyond what anyone could’ve expected, putting most American families in a less than favorable situation financially speaking.
However, inflation spares no one, and those with savings accounts know just how impactful the depreciation of money can be on their finances.
Even now, the inflation rates are incredibly high, driving the cost of necessities through the roof and making it impossible to get by on an average paycheck.
We’re going to go over some of the things you can do to make sure your savings are not impacted by this economic phenomenon, and if you keep reading you may just be able to save yourself thousands of dollars in the long run.
Do yourself and your money a favor by implementing these strategies and your future self will be thankful for the things you’ve done.
How does inflation work?
While the term gets thrown around a lot, few actually know what inflation actually is, and they rely on media channels to tell them just how bad things are.
In a way, inflation is a way of telling how much prices of certain items have increased over time, and it’s usually given as a percentage, as it’s the best way to gauge just how much of a price increase had happened.
With a 10% inflation rate, something that costs $1 will cost $1.1 in the coming year, and even if it may not seem like a lot, a flat 10% inflation rate on every expense would completely drain your finances before you’d know it.
In fact, you may have already felt this on your grocery purchases and utility bills, both of which have gotten more costly in the past couple of years.
Spotting these changes on your savings is much more difficult though, and it’ll take a lot of thorough examination and dedicated work to prevent your hard-earned money from depreciating.
Savings vs. inflation
If you’ve got money stored in some account, that means that without any interest rates on your savings, the $100 you contribute to the account will be $100 even if you take it out a decade after.
However, in the ten years that have passed, you likely won’t be able to afford the same things as you could the day you deposited the money in your account.
In a way, the $100 practically depreciated down to $90 with a 10% inflation rate, and that’s the horrible return on investment no matter how you look at it.
The same thing happens to any savings whose interest rates are below that of the current inflation rate, and you’ll essentially be losing money with every day it spends in the bank as things continue to become more expensive.
Even if the inflation rates were to settle down somewhat, potentially dropping to 6%, those with savings accounts would still be losing money over time.
Find the best interest rates
With all of this in mind, it’s only logical to look for a savings account with the best interest rates, which is often easier said than done.
This was a herculean task back in the day, but with the whole world having embraced the digital age, switching your savings accounts is as easy as pressing a button.
However, getting a better rate also means committing your money for a longer time, which isn’t really an option for those looking to retire at a certain age.
As a rule of thumb, the longer you’re willing to part with your money, the better interest rate you’ll get, although you should set a reminded for when this period ends, as you can then look for a better deal, having practically frozen your assets for a decade, allowing them to survive the test of time.
Another way to prevent your money from depreciating is to place it in some form of long-term investment such as a stock or an ETF, so long as the investment you’re making is well calculated.
You can get help with your investment plans from a number of different sources, and there are even applications you can download for free which will give you firsthand information on what the pros are committing their money to.
Keep in mind that you shouldn’t be making any long-term investments with the money you’ll need tomorrow, and seasoned investors will tell you that only money you won’t need for the next 5 years is suitable for this sort of commitment.
Past performance is never an indicator of how a stock or an ETF will perform in the future, so it’s all essentially gambling, but if you diversify your portfolio, whether it’s through making calculated investments or putting all your money in an index fund, you’ll be able to hedge against any potential losses that may come.