Inflation has been in the news for the past few years. Even if you’re not tired of hearing about it, you’re probably tired of soaring prices at grocery stores and gas stations.
As of March 2024, the U.S. inflation rate over the past 12 months was 3.5%. Inflation has slowed since hitting a 40-year high of 9.1% in 2022, but remains below the Federal Reserve’s long-term goal of 2%, which it considers ideal for employment and price stability. Exceeds.
Not only does inflation have a negative impact on the economy as a whole, it can also make it harder for the average consumer to save. Let’s take a closer look at how inflation affects your savings and what you can do to combat it.
What is inflation?
Inflation measures the increase in the prices of goods and services over a period of time (usually a year). When inflation is high, it means that the prices of goods and services are rising rapidly. When inflation is low, prices rise slowly.
Inflation is measured by dividing the change in the price of a product or service (or group of products or services) by its starting price and multiplying that number by 100. The calculation formula is as follows.
Inflation rate = ((BA)/A) x 100
For example, let’s say you want to know the inflation rate for a carton of eggs last year. If the price of an egg is now $4, and one year ago it was $3.50, you can calculate the inflation rate using the following formula:
($4 – $3.50) / $3.50 x 100 = 14.29%
But inflation generally refers to more than the price of eggs. Inflation rates typically measure overall price changes for a wide range of goods and services, such as food, health care, and utilities. Economists measure this with various price indices. The most common is the Consumer Price Index (CPI), which includes goods such as housing, food, transportation, household goods, and health care.
How does inflation affect purchasing power?
Inflation can be thought of as a measure of purchasing power. As time goes on, prices will go up and your money won’t go down as much. In other words, you will need more money to buy the same goods and services.
For example, let’s say you spend $100 at the grocery store. That $100 provided him with food for a week. Now, buying the same groceries would cost you $115. I’m not buying anything new, but $100 doesn’t go as far as it used to.
Does inflation have a negative impact on savings?
Inflation negatively affects savings in several different ways. In the short term, inflation can make it difficult to contribute to your savings. If you have to spend more to meet your basic needs, you will save less money.
Inflation can also reduce the value of your savings over time. If you keep your money in a traditional savings account, i.e. in cash, you lose purchasing power over time because your interest income (if any) can’t keep up with inflation. In other words, what you save today won’t be as useful in the future.
When inflation is high, you need to earn a very competitive interest rate to preserve your savings. Otherwise, reserves will effectively diminish over time.
read more: What is the average savings amount by age?
How to protect your savings from inflation
Rising inflation is bad news for your savings, but there are things you can do to protect your money. To minimize the negative impact of inflation on your personal finances, consider the following tips.
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Choose a high-yield savings account. When inflation is high, it’s important to keep your savings in an account that outperforms the inflation rate. Fortunately, higher inflation rates often result in higher savings interest rates. To get the best interest rate, you need to find a high-yield savings account. In some cases, the interest rate exceeds his 5%.
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Consider CDs. Certificates of deposit (CDs) tend to offer higher returns than savings accounts and have fixed interest rates for a set period of time, called a term. However, there is a catch. You can’t touch your money until the CD matures. Otherwise, you will be subject to early withdrawal penalties. If you can afford to set aside your savings for a while, you can get a very competitive interest rate over the term of your CD, even if interest rates drop.
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Build an emergency fund. Interest rates may rise as inflation increases, making it more expensive to borrow money. That’s why it’s helpful to have an emergency savings fund. Even if your car breaks down or your water heater breaks down, you can cover the costs without taking on large amounts of debt.
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Invest: The higher the inflation rate, the faster the cash in your bank account will lose its value. Historically, investing is not without risk, but can lead to higher returns. This allows you to continue building wealth even during periods of inflation.
Check your expenses: Inflation can easily cause your expenses to increase without you noticing. Therefore, it never hurts to check your budget. If you’re struggling to save, you may decide to cut back on your discretionary spending until you have a little more room.
