Inflation’s Personal Impact on your Savings

I like to think of inflation as a robber who takes a small amount of money from me every day. In 2019 the average inflation rate was 1.8%. Now, what does this mean? Well, every year 1.8% of the money in your bank account essentially becomes worthless. Your money became less valuable by 1.8% from January 1st in 2018 to 1029. As prices in the world increase slowly, your purchasing power becomes that much weaker. Over the past ten years, the national inflation rate averaged 1.77%. So to put this in context, if you had $10,000 in your bank account, as prices slowly increase year after year, your $10,000 in 2010 would have the purchasing power of only $8,364.52 in 2020. So when I think of inflation I don’t think of how prices increase, but rather how my money becomes less valuable, and what I need to do to overcome this.

As young kids, we were always taught to save our money, and as this is, of course, excellent advice, we must understand the costs of doing so. Creating an emergency fund is a vital step to achieving financial freedom and success, but over-allocating funds into your savings mindlessly can become counterproductive. Saving money to invest in large assets can be a challenging process and in some circumstances, increasing the amount of money in your savings can be beneficial. Now on the contrary, if you decide to just funnel all of your income into savings without an intent or purpose, your money will slowly “decay”, and over time it will lose its value.

When we research investments that we make, it’s important to analyze their growth potential in relation to inflation rates. If your investment is generating less growth than the rate of inflation, then technically you are still losing money as a result of the rise of inflation. It may appear that you are still making money, but if your investment returns an annual rate of 1%, and the inflation rate for that year was 2%, then you still lost 1% of your portfolio’s value, even though it won’t appear so.