Why Inflation Matters

by Pam on June 5, 2010

Inflation, the ever -increasing cost of everything over time, makes a significant impact on your savings.  In a normal, healthy economy, the inflation rate usually hovers around 3%.  Essentially, everything goes up in value except your money.  This is an important concept to understand as inflation impacts your purchasing power.

What can you do about inflation?

In order to ensure that you have sufficient funds to reach your goals for retirement, large purchases, etc. you need to be willing to take some risks with your money.  In other words, don’t expect to reach your medium and long-term goals by using a normal savings account.  Most savings accounts don’t pay enough to keep up with inflation so you are losing purchasing power as each year passes.

While regular savings accounts are okay for shorter term savings and for your emergency fund, money that you want to use to accomplish your other goals should be invested in something that will at least have a better chance of keeping pace with inflation.  There are many investment options out there including mutual funds, individual stocks, etc.   Do some research and find an investment that works best for you.   You work hard for your money, so you need to get your money working hard for you as well.  It won’t work hard if it just stays in a savings account.

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