Protecting Your Savings from Inflation
Saving money is a basic financial habit that makes up part of your overall financial wellness. Most financial advisors recommend that one save at least 20 percent of their net income. Everyone should have some money saved up, typically in an emergency fund for things such as loss of employment or chronic illness or in a retirement fund for golden years when earning power would be reduced. However, how one saves or where they do is also of equal importance, because of the effects of inflation on the value of money.
The Effect of Inflation on Your Savings
Inflation is a general increase in prices over time and the fall in the purchasing value of money. The effect of a rising cost of living is a reduction in the purchasing power of the money a person holds so that the same amount buys less. For example, take the cost of a one-pound loaf of white bread over a twenty-five year period. In January of 1988, the United States Department of Labor, Bureau of Statistics, indicates that a loaf of white bread cost approximately 59¢. In January of 2013, that same loaf of bread cost $1.42. Thus, in the twenty-five-year period, the bread increased 83¢ or rose by 140%.
With regard to your savings, you usually get some return on your savings via interest, depending on what kind of savings account you have, but inflation reduces the value of savings with time and hence the return you make on savings should at least give you something above the prevailing annual inflation rate. The year-over-year inflation rate projections for 2020 are at 2.0%.
If you had your money saved in a regular deposit account, you might be in for some erosion. The average deposit savings account interest rate is only 0.9%.
It is therefore important to not just save but save in a way that protects your funds against inflation. There is only one way to grow savings fast enough to make up for and completely offset inflation, and that is by investing. It is the best defense against losing purchasing power that protects your savings and grows the real value of your money.
An IRA CD is generally an option to consider if you’re looking for solid, guaranteed returns on retirement funds. Unlike other types of investments, they don’t come with as much risk. Online banks have some of the best IRA CD rates, some with 2.5% and up.
Although IRA CDs provide guaranteed returns, stocks and other investment options can provide much higher yields. An IRA CD should, therefore, only make up a modest portion of anyone’s investment portfolio. In fact, if you’re a younger investor, you might wish to skip CDs entirely and allocate all of your IRA to higher-yielding choices like stock mutual funds.
IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.
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