As inflation rises, your everyday costs – like energy bills, rent payments, food and fuel purchases – may become much higher and leave less funds available for savings or investments.
If you have savings, it is crucial that they are protected against inflation by taking measures to keep their purchasing power safe over time. Here’s how.
1. Lower purchasing power
inflation can have a devastating impact on savings accounts, particularly those saving for retirement. When prices increase, your purchasing power decreases and this leads to smaller savings over time.
This decrease can impact investments like savings accounts, fixed annuities, certificates of deposit (CDs), and bonds; they often suffer the most rapid loss in purchasing power over time.
Investing in Treasury inflation-protected securities (TIPS) can help protect against the erosion of purchasing power during periods of inflation. You could also try investing in commodities, like oil or metals that might maintain their pricing power during this time.
Economys suffer when purchasing power of currency decreases due to excessive inflation. This can have serious negative repercussions for economies, including rising living costs, global interest rate instability and declining credit ratings. As such, governments enact policies and regulate economic data to keep currency values at their maximum potential levels.
2. Higher interest rates
Inflation plays an integral part in your ability to reach your financial goals, impacting how much money will be needed in future for retirement, buying a house and travel.
If you want to maximize your savings, put it in an account with a higher interest rate than inflation. That way, your funds will grow more rapidly while avoiding losing out due to inflation.
Higher interest rates can cause you to experience purchasing power loss over time, meaning your savings will become far less valuable than when they began.
3. Higher taxes
inflation can have a devastating impact on your savings account, unlike interest rates that can fluctuate with economic changes; inflation affects it directly and directly affects you personally over time.
Inflation causes prices of goods and services to increase over time, leading to decreased purchasing power – or the amount you can buy with one dollar – leading to various economic impacts, from higher grocery store costs to increased gas costs.
Your short-term savings goals, like purchasing a home or saving for retirement can also be compromised.
As one way of protecting savings against inflation, investing in products with high rates of return and that are index-linked is an effective strategy. Some investments like bonds or annuities offer this feature.
4. Decreased liquidity
Inflation’s effect on savings can be substantial, particularly if they involve something that requires long-term planning – for instance if saving for something such as travel takes years. As inflation may reduce how much money you can put away towards it.
inflation can also diminish your savings over time, rendering them increasingly worthless over time. With inflation at 2%, for instance, your $100 savings account would require $102 in order to have the same purchasing power they did one year ago.
At times of high inflation, savers and businesses alike may switch out cash investments for higher real interest returns – this phenomenon is known as Mundell-Tobin effect.
