You may have heard your friends, family, and many others stressing the need to save. You may even have a savings account where you occasionally deposit some money. However, have you ever wondered if it will help you in the long run?
Saving money is absolutely pointless because the interest rate on saving instruments is usually lower than the inflation rate. Thus, with every passing year, the purchasing power of the money you’ve saved decreases.
If you want to know what you can do instead to grow your money, keep reading this article.
How Does Inflation Affect Your Savings?
Inflation means the general rise in the price of products and services over a period of time. When inflation increases, the value of money decreases, i.e., you can buy fewer goods with the same amount of money compared to an earlier time.
The table below shows the inflation rate in the United States for the past ten years.
Table 1: Inflation Rate Between 2021–2012
| Year | Rate of Inflation |
| 2022 | 8.00% |
| 2021 | 4.70% |
| 2020 | 1.23% |
| 2019 | 1.81% |
| 2018 | 2.44% |
| 2017 | 2.13% |
| 2016 | 1.26% |
| 2015 | 0.12% |
| 2014 | 1.62% |
| 2013 | 1.46% |
| 2012 | 2.07% |
On the other hand, in 2022, the average AYP (Annual Percentage Yield) for saving bank accounts is 0.11%.
Let’s try to understand what it means for you with the help of an example. Assume that you had $100 with you last year, and you had two options: to put the amount in your savings account or buy something which costs $100.
Had you decided to save the money, today you would have a total of $100.11. Unfortunately, at the current rate of inflation, the same product will likely cost you $104.7.
As you can see, inflation eats away the value and purchasing power of your money.
Investing as an Alternative to Savings
People think of saving as a safe option, while investing is seen as a risky choice. And that’s true to some extent.
However, before you rule out investing, take some time to think about the potential benefits it has to offer.
Investment Usually Provides a Better Return
Investment products often give you a better return on investment than saving instruments. For example, let’s take a look at the return rate of the Standard & Poor’s 500 stock index (S&P 500).
Table 2: S&P 500 Return Rate Between 2021–2012
| Year | Rate of Inflation |
| 2021 | 4.70% |
| 2020 | 1.23% |
| 2019 | 1.81% |
| 2018 | 2.44% |
| 2017 | 2.13% |
| 2016 | 1.26% |
| 2015 | 0.12% |
| 2014 | 1.62% |
| 2013 | 1.46% |
| 2012 | 2.07% |
Even though the return rate fluctuates wildly, it almost always trumps the average AYP of saving bank accounts.
Investing Can Help You Beat Inflation
Comparing Table 1 and Table 2 shows that the S&P 500 return rate beats the inflation rate more often than not. And if you don’t want to go for S&P 500, you can still achieve a similar result by having a diversified portfolio.
Thus, unlike saving instruments, investing mitigates the impact of inflation and helps increase the purchasing power of the money you put into your account.
Focus on Increasing Your Income
As mentioned earlier, when you save money, it grows at a slow pace, if at all. If you want to shoot up that pace, you should look for ways to increase your income. You can do that by learning a high-income skill or investing in the stock market.
This can mean different things to different people, depending on their occupation and position on the professional ladder. For example, some people can focus on upskilling themselves and get a salary hike and promotion.
However, that might not be possible for others, and they’ll have to find another option. They can look to take up some side hustle and supplement their current income.
