Inflation Effects on Savings: How Rising Prices Reduce Money Value

It is common for people to underestimate the effects of inflation on savings. Essentially, as inflation causes money to lose purchasing power, any amount you deposit will continue to provide less and less in terms of goods, services and possibly interest; therefore, unless you take an active approach toward preserving the impact of inflation on your savings, you may see that inflation erode your savings over time without your knowledge.

To ensure long-term financial stability, it is important to fully understand how inflation works and what steps you can take to safeguard against the loss of your financial resources.

What Is Inflation, and Why Does It Matter for Savings?

Inflation is the increase of prices for products and services over time. Inflation causes the value of the dollar to decrease. Additionally, because it takes more dollars to purchase the same amount of goods and services due to the higher inflation rates, the direct impact on savings, especially for those who have put their money into low-interest accounts, is significant.

One way in which the impact of inflation on savings can be seen is when your savings account’s growth rate is less than the rate of inflation.

How Inflation Effects on Savings in Real Life?

In practical terms, inflation can impact savings by decreasing the amount of what can be purchased with savings each year, by decreasing the total amount of money in an FDIC-insured account after inflation and by making emergency savings less effective; and, in turn, increasing the amount needed for long-term financial goals.

For example, if your savings account earns 4% interest and the inflation rate is 6%, on an annual basis you are losing 2% of your savings due to inflation.

Why It’s Risky to Allow Your Financial Situation to Sit Idle

Many people think that saving money is a good thing, and to an extent they are correct. However, the truth of the matter is that inflation has a huge effect on what happens to your saved funds. The most obvious consequence of saving is that if you store your cash in a savings account or a safe at home, you are losing value on that cash due to inflation. Therefore, if you want to save for retirement, build an education fund, or simply accumulate wealth, this will have a negative effect on what you can achieve.

Four Ways to Mitigate the Risks of Inflation on Your Savings

1. Invest in Financial Instruments with High Long-Term Returns (Inflation-Beating Instruments)

If you are serious about limiting the effect of inflation on your savings, you should consider investing in some form of financial instrument that offers superior long-term rates of return (which exceeds the rate of inflation) and provides long-term security.

2.Maximize Your Use of Fixed Deposits

Although fixed deposits can be an excellent vehicle for investment, they may not always provide an adequate return compared to inflation.

3.Investigate Government-Approved Program Options

There are many programs that have been recently developed by the government that specifically seek to protect your savings from the effects of inflation, as well as support long-term growth. Most of these programs are designed with the more conservative investor in mind.

4.Continue to Review and Adjust Your Financial Plan

Inflation fluctuates year-to-year. As such, it is necessary for you to periodically look at your financial plans to ensure that your investment strategies are being adjusted to meet the realities of the current economic climate, while still allowing you to reach your ultimate goals.

How Does Inflation Impact Long-Term Financial Goals?

Inflation can negatively affect a person’s ability to achieve long-term financial goals such as saving for retirement or their child’s education, because the cost of everyday items increases every year and without proper saving techniques, it leaves individuals with a large financial gap.

Being able to take into account inflation when planning for investments, helps you also prepare for your lifestyle after retirement or more expensive items in the future.

Some of the most common mistakes made by investors during inflation are:

• Only relying on savings accounts
• Not accounting for inflation while setting up your goal(s)
• Not investing due to fear
• Not increasing their sources of income

It is important to avoid these common mistakes in order to minimize the impact of inflation on your savings.

Final Thoughts: Stay Ahead Of Inflation?

Inflation may be unavoidable when it comes to your savings but planning adequately can manage the effects of inflation.

Simply saving will not protect you from inflation, so being smart about your savings and investments will help to secure your lifestyle for future generations.

By setting aside savings, investing in a diversified portfolio and regularly reviewing this portfolio will help to protect your money long-term for yourself and your children. For More Info : MYOWNCFO.