If you know anything about the world of personal finance by now (and you’re here, so you obviously do), you’re aware of the importance of saving money. While it’s wise to save your hard-earned dollars, there’s a pesky factor that just might eat away at your savings over time. Let’s say that you spent MONTHS saving up enough to buy that sweet new gaming console. But wait- a year later, it costs $50 more?! What happened?  Inflation was surely to blame here, and in this article, we’ll uncover its secrets and discuss its effect on your savings accounts.

Saving is important for many reasons - providing an emergency fund, opening opportunities for future investments, and generally instilling good financial habits at an early age. Your money may appear secure now, but without some careful planning on your part, it will start losing value due to inflation. Imagine inflation as slowly letting air escape a balloon - your buying power decreases. Over time, your money loses its "buying power." A candy bar that cost $1 last year might cost $1.05 today. Not a huge deal, right? These seemingly small differences may seem inconsequential at first, but even minor price adjustments can have long-term ramifications for your funds because over the years they add up, making your hard-earned cash less valuable. Simply put, inflation refers to any rise in overall product and service prices across an economy - although a modest inflation rate may seem harmless enough at first, it can have serious repercussions for your savings.

Traditional savings accounts typically offer interest rates lower than inflation. This means while your money might earn a bit extra, it can’t keep up with rising prices. This is where nominal vs. real value comes in: The interest you earn on your savings is the nominal return. However, the real return is what matters after accounting for inflation. If your nominal return (interest rate) is 2%, but inflation is 3%, your real return is actually -1% because essentially your money is now worth less and your buying power has decreased.

Imagine that you’re on a treadmill- inflation is the treadmill speed, and your nominal return is your speed. If they’re equal, you’re staying in the same spot (not earning money) even though you feel like you’re running. If inflation is much higher than the nominal return- you’re getting flung off the treadmill entirely (aka losing money/buying power). 

We know that most savings accounts offer interest rates that don't match inflation's growth, leaving your funds unable to keep pace with rising prices. Let's examine how that can low-key impact savings accounts in big ways and what to do about it.

So how do you combat inflation? I’m so glad you asked:

• Set aside part of your savings for investments that tend to outpace inflation, like stocks. Although these may carry risks, they also present the potential for greater returns.

• Diversifying your investments across stocks, bonds, and real estate may help mitigate inflation's effects on your overall portfolio.

• Be mindful of the rates offered by various savings accounts. While rates may not always outpace inflation, choosing accounts with competitive rates can make a difference.

• Make regular deposits into your savings. Contributions can help your savings accumulate over time and reduce the effects of inflation.

Understanding the dynamics between savings and inflation is an important part of safeguarding your financial future. While inflation may seem sneaky (because it is), being aware of its effects allows you to make informed decisions for your savings strategy. Explore different savings and investment options; diversify your portfolio; adapt to shifting economic conditions as necessary - this way, not only can you protect your $$$ but also secure its longevity for years to come!

Bonus Tip: Think Outside the Piggy Bank!

While savings accounts and investments are important, there are other ways to combat inflation! Consider:

• Building Your Skills

  • Invest in yourself by learning skills that are needed. Not only will it boost your future employability, but it can also take you to better-paying opportunities that counter the sting of inflation.

• Exploring Side Hustles

  • Turning a hobby into a side hustle can bring in extra income to compensate for rising prices. From freelance writing to pet-sitting, there are tons of possibilities out there!

• Sharing Resources

  • Consider swapping or sharing higher-cost items with friends and family instead of buying everything new. It's a win-win – you save money and build stronger connections!

Get creative, think outside the box, and you’ll more than balance the inflation equation.