How Inflation is Quietly Eroding Your Savings (and What to Do About It)

You work hard, you save diligently, and you watch your bank account balance grow. But there's a force at work that is constantly making that money worth less: inflation. Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.

The Concept of Purchasing Power

To understand inflation, you need to understand "purchasing power." Imagine that 10 years ago, $100 could buy you a full cart of groceries. Today, that same $100 might only buy you three-quarters of a cart. The dollar amount is the same, but its purchasing power has decreased. The groceries didn't get better; your money just got weaker.

If you have $10,000 sitting in a savings account earning 0.5% interest, but inflation is running at 3%, you are effectively losing 2.5% of your purchasing power every year. Your account balance is going up, but your ability to buy things with that money is going down.

Visualizing the Impact

The effects of inflation can be subtle year-to-year, but they are dramatic over the long term. Let's see what happens to $1,000 over 20 years with an average inflation rate of 3%:

• Future Cost: To buy something that costs $1,000 today, you would need over $1,806 in 20 years.
• Lost Purchasing Power: In 20 years, your original $1,000 will only have the purchasing power of about $554 in today's money.

This is why simply saving cash in a low-yield account is a losing strategy for long-term goals like retirement.

How to Protect Your Wealth from Inflation

You can't stop inflation, but you can take steps to outpace it. The primary strategy is investing in assets that have the potential to grow at a rate higher than inflation.

1. Stock Market Investing: Historically, the stock market has provided average annual returns of around 7-10%, which significantly outpaces the average rate of inflation.
2. Real Estate: Property values and rental income tend to rise with inflation over the long term.
3. Inflation-Protected Securities (TIPS): These are government bonds that are indexed to inflation to protect investors from a decline in the purchasing power of their money.

Take Control of Your Financial Future

You've run the numbers. Now, put them into action. PocketSmith is the ultimate tool to manage your budget, track your net worth, and forecast your finances.

Explore Plans

Understanding inflation is the first step toward protecting your financial future. By making informed investment decisions, you can ensure your money doesn't just sit there, but grows and maintains its power for years to come.