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Inflation affects every part of your daily life. Groceries, tuition, and streaming service prices go up as inflation increases. If daily expenses are rising faster than the money in savings accounts is growing, that can be enough to make people rethink their personal savings plans.
Inflation is a complex economic occurrence that happens when purchasing power declines and the price of goods and services goes up. Inflation is mainly measured in two ways:
It’s universally accepted that inflation is complicated. Economists have argued about different causes and potential answers to gaining power over the economic phenomena, but in some ways inflation is like the weather, impossible to control and hard to predict.
Much like how you’d prepare for an oncoming storm, if you’re informed you can prepare for and react to inflation before getting into deep water. Read on to find out how to get your weather report. You’ll learn a little about inflation’s dynamics, how it might affect the money in your savings accounts, and how to evaluate your fixed-rate investments.
Compound interest is an economic element that can both positively and negatively impact inflation. Whether the effect is positive or negative depends on if the interest you’re earning is more or less than the inflation rate.
If the interest rate you’re earning is higher than the inflation rate, you’re benefiting from compound interest. If it’s lower, that’s when your purchasing power is eroding because compound interest can’t keep up with inflation rates.
If you’re concerned about the purchasing power of your invested money, you need to calculate the real interest rate of your investment. A real interest rate represents the actual purchasing power gained or lost by an investment when taking the effects of rising prices into account. Real interest rates can help maintain value by providing a more accurate understanding of the return an investment gains as it takes the price of goods and services into account.
Before you decide what to do with your savings during inflation, consider a few things. How long are you planning on keeping your money invested? What are the trusted experts in the field projecting for interest rates in the future?
Here are tips on how to evaluate the two most common fixed-rate investments during an inflationary period.
Inflation is unpredictable. It often affects the types of savings that are considered the safest such as bonds and Certificates of Deposit for the very reason they are considered safe. They don’t fluctuate with the economy. While it’s difficult to see your bottom line suffer due to an economic force, there are ways to protect yourself from future fluctuations. The idea is simple. Don’t keep all your eggs in one basket.
You can mitigate the impact of inflation on investments by spreading your economic risk across asset classes. This can insulate your finances from market crashes that could affect more inflation-resistant investments such as real estate or stocks as well as preventing inflation-affected investments such as Certificates of Deposit from ruining your bottom line.
Those that want an account that will fluctuate with the economy and diversify their investments may be interested in an investment account such as an IRA, these accounts have varied investments that keep up with the economy without needing hands-on attention. While an IRA is reserved for retirement, those looking to build an emergency fund or save for a child’s future might be interested in investing in a money market account which works similarly.
During times of inflation, it’s best to have a passive approach to investments. Even the best economists can’t perfectly predict what will happen next, so diversifying your investment portfolio by investing your funds in a money market or market index account is the best strategy.
At DCU, our mission is to help our members’ finances flourish in any financial weather. We know inflation impacts the cost of everyday expenses but putting aside money for the future is still important. Responsible saving should be rewarded with healthy dividends, and we’re here to provide them. That’s why we offer some of the highest savings rates in the country*. Check out our Primary Savings and Advantage Savings rates to learn more.
*The national average annual percentage yield ("APY") for savings accounts is updated monthly, please refer to the Federal Deposit Insurance Corporation.
In times of inflation it’s important to review your finances regularly and adjust your budget as needed. You may want to adjust your financial goals to make sure they’re still where they need to be as the costs of the items you're saving for and your dividends may be in flux.
Financial literacy in times of inflation is more important than ever. Anyone looking to better their financial outcomes can turn to DCU. Our financial education center is available to help you learn more about your personal and family financing. We also offer a range of calculators to help figure out how much you need to save to reach your financial goals, factoring in the interest rates available.
Are you ready to start banking with a credit union that’s dedicated to the health of your financial future? Learn more about becoming a member. DCU can help you weather whatever financial phenomena that might come your way with more confidence.
Please note, membership is required to open an investment or savings account. Visit our membership eligibility page for more information.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.