How to Outrun Inflation and Protect Your Spending Power
Whether you are afraid of investing, unable to financially, or do not understand the purpose. Know this. If your money is sitting in a bank account, earning little to no interest, you're losing money.
Know your spending power
Let's say you have a hundred dollars in the bank. Today, that's a hundred dollars of spending power. However, each year that money sits in the bank, not earning interest, its spending power is reduced by the amount of inflation.
If inflation experiences an increase of 2% over a year, you would now have $98 instead of $100. Of course, your bank statement would not decrease by two dollars, but its spending power on the streets would.
Meaning, if you can purchase those new sneakers you've been eyeballing for $100 today, chances are good that they will cost you $102 next year.
This example is not intended to encourage you to go spend your money now before prices rise! It just means that you should be thinking of ways to protect your spending power.
Here are the inflation rates from the last ten years, according to tradingeconomics.com.
According to Trading Economics, inflation rates fell to 1.8% in August of 2019. They also claim that from 1914 to 2019, the inflation rate averaged 3.26%. You can decide what you think is the appropriate percentage. That fact remains, you need some sort of protection against inflation.
How to outrun inflation
There are many ways to outrun inflation, investing in equities is a popular one. But, wall street can be intimidating to some, and I want this article to benefit everyone. The good news is, a savings account can be sufficient.
Not all savings accounts are created equal
There are some remarkably good options nowadays: Wealthfront, Betterment, and Simple, to name a few. Their interest rates fluctuate, so you'll want to do some research, but most of these offer at least 2% APY.
That means you’ll be about breaking even when compared to average national inflation rates. It’s the bare minimum you should be targeting. That way, you’ll know that your spending power remains intact for years to come.