Does Inflation wreck Savings?

Can inflation wreck savings? Because it’s tied to the dollar’s value, the purchasing power of the money in your savings may be diminished. It’s not like this “devaluation” happens and is reflected in your savings statement. You’ll have the same amount of money in your savings account in a week as you have today if you don’t withdraw it.

Instead, it’s the purchasing power that suffers. If you’re saving up for a car, the $25,000 in your savings account won’t buy you quite the car you could purchase if inflation were in check and the economy wasn’t suffering inflation.

Inflation also makes it harder to save money since your funds go to groceries, rent, and gas.

Since the bank may pay a variable interest return on your savings account, you may see little interest paid on an ordinary account balance. In that way, can inflation wreck savings?

Are You Losing Money In A Savings Account?

Savings accounts mean something different to different people. It’s one thing to keep your money in savings and never withdraw it until you’re old and lame. In that case, your money can be used when the value is high and forgotten when the value is low, as with times of inflation.

If, on the other hand, you’re retired and living off your savings, your living expenses are going up. You’re paying more for groceries, gas, and services, and because you’re retired, you’re taking more funds from your savings account to pay for it.

If inflation wasn’t an issue last year, then last year you would have paid less dollars you have stashed away for everyday items like food. That means your savings are worth less during inflation.

Can inflation wreck savings? If so, what to do?

What To Do With Savings During Inflation

To mitigate the effect of inflation on your savings accounts, you can take some steps. Usually, people turn to the stock market and real estate for places to ride out inflation.

In real estate, inflation drives the cost of building materials up, as does the property’s value. It takes a little foresight to see an inflation bubble coming, but if you get ahead of inflation, you could invest your money in real estate. Then, you’ll watch the value of your investment rise rather than fall as when it’s in a savings account. Like anything else, there’s risk in real estate investing, so do your homework.

You can also invest in the commodities market, buy inflation-indexed T-notes, invest in gold, and if you want to live in your own times, consider buying Bitcoin. While you seek financial advice from your advisor, because none of it is insured, here, generally, are the advantages:

• Commodities: You can hedge your bets in the commodities market if you know how, and the price trends upward during inflation.
• Inflation-indexed T-Notes: For example, I-Bonds are indexed to the inflation rate and are an excellent hedge against inflation but require a time commitment to see the best results.
• Gold appreciates during inflationary times, and many people put money into it.
• Bitcoin is not connected to the inflation rate, though it fluctuates in its sphere. The long-term outlook for Bitcoin is optimistic, so investors put their money there to hedge against inflation.

Why does the Stock Market Go Up?

During inflation, stocks act like stocks. For people fleeing from inflation, stocks mean a regular dividend gets paid to offset the adverse effects of inflation.

Despite inflation, companies grow, and as they grow, they pay dividends to investors. The reason this happens during inflationary periods is because money snowballs. If you pay more for groceries, that means Company A makes more money, making them a less-risk customer for loans, and that means companies can borrow and expand their activities to meet demand. The end result is higher productivity and output. That translates into a dividend payment to stockholders.

So, putting your money in the stock market during inflationary periods is a good hedge against inflation. Ask your finance advisor about buying stock during inflation. Ask about buying real estate property because it might be better there than in a savings account.

Is My Money Safe in a Bank?

Of course, your money is safe in a bank. The Federal Deposit Insurance Corporation insures it, and the FDIC label is on every bank door.

The FDIC insures deposits up to $250,000, so if your savings amount to more money, you should move it into another account. Still, if you like your bank, you can keep it in another insured account, like a checking account, money market account, or a Certificate of Deposit. You can also open an account in another bank to enjoy FDIC insurance.

When you have your money in insured accounts, there’s no threat to you when a bank fails. The FDIC steps in and covers the loss. Be sure you are in insured accounts, though. Banks offer investing funds, treasury note accounts, and municipal investments. FDIC covers none of those.

When BAnks are Threatened

Can inflation wreck savings? Experts say that banks facing a recession can find themselves threatened when their fixed-income portfolios are over-valued, that is, the value of their bonds and certificates of deposit. This situation led to the failure of the Silicone Valley Bank early in 2023, leading to a regional panic. Whatever else, the example underscores how important it is to put your money in FDIC-insured accounts.

As mentioned above, stock investments do not enjoy FDIC insurance coverage, and stocks are always risky. Discuss the risk of buying stocks in inflationary times with your financial advisor.

Are Savings Accounts Worth It?

The value of a savings account is measured by how secure it keeps your money, and as discussed above, it’s insured in a bank savings account. Beyond that, a savings account can be measured by the interest it pays.

So, shopping around for the best return on your savings account is often a good idea. According to Investopedia, put your money in savings where the interest is compounded daily, and there are no monthly fees.

Here are three compounding, no-fee savings accounts:

• BMO Alto Online Savings Account
• American Express High Yield Savings
• SOFI Checking and Savings Account

What is the Downside of a Savings Account

The three most significant problems with regular savings accounts are:

• The bank’s fees to keep your money secure.
• The variable interest rate you experience.
• The inflation problem.

If you can put your money in a high-yield APY account with no monthly fees, you’ve optimized your savings account experience.

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