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How Factoring in Inflation can Save You Money

How Factoring in Inflation can Save You Money

A core reason people invest is to hedge against inflation and protect the value of their savings. Though there are risks investing in the public stock market, holding on to your savings without investing can also have a devastating impact on your wealth in the long-term. As inflation constantly threatens to erode the value of your money, it should be a key factor guiding your investment decisions and plans.

Inflation represents a rise in the price of goods and services, and the subsequent decrease in purchasing power. Because of the time value of money, $100 this year at 5% inflation, and $105 next year would have the same value. Knowing how inflation works allows you to better evaluate your investment decisions and progress. If inflation is 5% and your investments are growing by 3%, the value of your wealth is actually decreasing and you are losing 2% of your savings. Such a strategy reflects the problems of looking at financial risk solely in terms of losing your money, instead of also losing the value of your money. Taking this into consideration clearly becomes more difficult when looking at the time value of money 30-40 years into the future. Here you have to reconcile the difference in what goods and services will cost in the future and the purchasing power of your savings at that time.

Factoring in inflation is a must. How will the long-term growth of your savings be impacted by a recession or several market dips? Inflation figures are readily available on government websites, using indicators like the Consumer Price Index (CPI). With low-interest rates alongside high-inflation, it is pertinent more than ever to take into account and seek investment vehicles that adjust or account for inflation – especially after taxes and fees.