Grandpa was right; a loaf of bread did cost 10 cents several decades ago. (As for walking to school uphill both ways in a snowstorm, that’s debatable.) But bread doesn’t cost 10 cents anymore, and even if you’re not an economist, you probably know it’s because of inflation.
How does inflation affect your savings? And, is there anything you can do about it? Here’s what you need to know to protect your buying power down the road.
Inflation reduces the purchasing power of your money.
In the simplest terms, a dollar today buys less than a dollar way back when. That’s why the loaf of bread your grandpa could get for 10 cents in 1940 costs around $1.30 today.
By definition, inflation is the percentage increase of the cost of goods and services over time. It’s measured by the Bureau of Labor Statistics, which compiles data to determine the Consumer Price Index (CPI). The CPI includes items such as groceries, gas, electricity, clothes and used cars.
You can earn interest to help combat inflation.
To protect your buying power, you need your money to earn interest at a rate that keeps pace or beats the current inflation rate.
Think of it like this: if the average rate of inflation for one year is 1.8 percent, as it was for 2017, it stands to reason that you need to earn at least 1.8 percent on your savings that year to keep up.
Your savings rate can make a difference.
You have plenty of things to worry about besides calculating inflation and chasing interest rates. After all, you can’t change the market. But, if you’re looking for a way to build your balance without losing too much ground to inflation in the process, a savings account with a competitive rate can be a step in the right direction.
The average interest rate on savings accounts has hovered well below 1% for the past several years. In fact, when’s the last time you checked your savings account rate? If it’s been awhile, you might want to find out if you’re missing out on extra money.
The truth is, you likely won’t find a savings account that keeps perfect pace with the rate of inflation. But you should be able to find one that gets you close. Keep in mind that online banks often offer better rates than traditional brick-and-mortar banks.
Regular deposits help grow your balance.
One of the key benefits of an online savings account is that you can make regular deposits, unlike with a CD (certificate of deposit), for example.
Take advantage of that accessibility by making sure you’re saving regularly. Those consistent deposits and a competitive rate will team up with the power of compounding interest to really grow your balance.
One way to be sure you’re making regular deposits is to put your savings on “cruise control” with recurring transfers or direct deposit. These are typically simple to set up and adjust when you need to.
When you’re ready, explore higher returns.
Once you have a balance that makes you feel proud, you may want to explore other ways to save that offer higher returns. CDs, for example, often have higher APYs (annual percentage yields) than savings accounts; some even beat the pace of inflation, especially if you are able to commit to a longer term.
Consider investing, but do your research first.
Another way you may be able to outpace inflation is by investing. If you can handle higher risk, you may want to consider investing in a variety of mutual funds and stocks. Keep in mind, though, higher stock market returns come with a higher measure of risk. Be sure to do your research before you make a move.
At Ally, we believe the right way to protect your buying power from inflation depends on your unique situation—and we are tirelessly innovating to help you make the most of your money.
Ally Bank offers deposit products along with the safety and security of FDIC insurance, up to the up to the maximum allowed by law.
Ally Invest offers products tailored to customers who prefer to manage their own trading as well as those who prefer a hands-off option. Just remember, investing involves risk, including loss of principal. Ally Invest products are not FDIC-insured, not bank guaranteed, and may lose value.