How Inflation Affects Your Savings
While your savings might be growing in nominal terms (the number on your bank statement), they might be shrinking in real terms (what you can actually buy with that money) if the interest rate you are earning is lower than the inflation rate.
What is the Consumer Price Index (CPI)?
In the United States, the Consumer Price Index (CPI) is the most common measure of inflation. It tracks the price of a basket of goods and services including:
- Food & Beverages: Groceries and dining out.
- Housing: Rent and homeowner costs.
- Transportation: Fuel, public transit, and car prices.
- Medical Care: Healthcare services and supplies.
- Energy: Electricity, gas, and oil.
How to Protect Your Money from Inflation
Keeping all your money in a standard checking account is usually a bad idea during high inflation. Consider these strategies:
- High-Yield Savings: Earn more interest than traditional accounts.
- Investing in Stocks: Historically, the stock market has outperformed inflation over long periods.
- Real Estate: Property values and rents often rise with inflation.
- TIPS (Treasury Inflation-Protected Securities): Bonds that are indexed to inflation.
The Power of "Real" Returns
When evaluating an investment, always subtract the inflation rate from your expected return to find your "real" return. If your investment earns 7% but inflation is 3%, your real return is 4%.