Your savings account might seem like the safest place in the world to keep all your money.
In a sense, this is true because your account balance will never fall in value. However, the actual purchasing power of your savings could be going down even though the balance does not change as it may be depreciating from inflation.
What is inflation?
Inflation is when the purchasing power of the dollar goes down. Over time, prices in the economy tend to go up.
As a result, you will be able to buy less in the future with one dollar than you could today. This is a problem that can often go by unnoticed.
Since your account balance stays the same, it is hard to see that your money is not able to buy as much as before. However, inflation is slowly but steadily grinding away at the value of the dollar every year.
“Inflation is something you need
to be aware of for your finances.”
Why is this a problem with savings accounts?
Savings accounts tend to pay a very low interest rate on your money. You can never lose money with these accounts, but you do not make very much either.
Inflation in the American economy tends to average about three to four percent a year. If the money in your savings account does not earn at least the inflation rate, your savings will not be able to buy as much in the future.
How do you handle this problem?
Your savings account is good for money that you might need in the near future. This could be where you put your money for everyday spending as well as your emergency fund.
For these categories, it is important that your money is in a very safe place that is easy to access.
Your savings account definitely meets these requirements. For long-term financial goals like retirement, you probably should not use a savings account.
You would get much better long-term growth with stocks and bonds, as these investments do a much better job avoiding the depreciation that comes from inflation.
Inflation is often a hard problem to see, but it is something you need to be aware of for your finances. Do not be too reliant on your savings account because you risk depreciating your money through inflation.
Photo source: 21stcenturynews.com.au.