It is generally accepted that saving money in a bank savings account is a great idea, and on the surface it is a good idea, it is better than spending it needlessly. But don’t rely just on a savings account as there is one thing that makes saving money for the future this way a bad idea, and its one simple economic force called: Inflation!
I am going to talk generally here as there are exceptions to the points that follows, however this is to give you a basic understanding as to what is involved.
The whole idea behind saving is to put money away to be used later. Many people use a savings account to do this. But what if that moneys buying power is reduced little by little each year?
This is what inflation does, it reduces the true value of your money bit by bit every year. You still have the same amount of money however, it now buys you less than before.
“But my savings account gets interest!” I hear you say. Very true, however that savings account interest rate will generally be less than the inflation rate. The net effect is that the buying power of your money will still decrease over time.
The rate of inflation is called the inflation rate. You will hear this term used often. Our goods and services generally increase each year by the inflation rate. This also represents the decreasing value of your money over a year.
Lets have a practical example.
Lets assume you there is a pair of $100 shoes being sold at a store, which, if you bought them today would cost $100.
Lets assume that you finally decide to buy the shoes a year later.
Assuming it is exactly the same pair of shoes, and that the inflation rate for the year was 6% which increased their prices by that amount, then those shoes would cost $106. You need more money to buy the same item, you need to find an extra $6. So the true value of your money, of all of your money, has decreased within that year.
Imagine how much your buying power would decrease in 3 years, 7 years, 20 years!
To keep up with inflation a savings account would need to have an interest rate that is equal to, or above, the inflation rate to have any chance at keeping the value of your money – but they don’t!
Now you know why each year becomes more of a struggle unless you can increase your income, no matter where it comes from! A savings account just isn’t going to do.
So if a savings account won’t work then how do you preserve the true value of your money over time?
Wealth System, Finance
