There are few things that can sabotage your savings like inflation can. When we earn money and put it aside, we assume that we will be able to use it later to buy the same things we could buy at the time we earned it. Unfortunately, this is usually not the case. In fact, the longer you save, the less likely it is to be true.
The Leaky Dollar
Inflation eats away at the purchasing power of our savings little-by-little every day. It’s what makes things cost more today than they did when we were children. Do you remember a time when a hamburger was less than a dollar? What if you saved a dollar back then, expecting to buy a hamburger with it in 15 years. You would have been pretty disappointed.
Why Have Protection?
How bad is it really? It may not seem that bad, but that’s probably because you eat most of your hamburgers with money you’ve earned recently. When you save for a special vacation or for education or for retirement, you have to make sure that you keep up with inflation so that you can still buy the hamburgers you need when you actually plan to eat them.
The average rate of inflation is historically closer to 3% but let’s assume it to be only 2% per year. That’s actually the government’s current target. After a single year, a $3 hamburger would cost $3.06. That’s hardly anything to worry about, but let’s say that you planned to buy that hamburger for your son when he goes to college in 10 years. At that point, the hamburger would cost $3.65 cents. Either your son would have to go on a diet, you are going to have to come up with the difference.
Now let’s consider something even more serious. When we retire, it’s often because we can’t work as much anymore. At that point, we are actually going to depend on our savings because it would be all we have to replace our income. Unfortunately, retirement may be more that 30 years away and some of your money may have to sit even longer than that before it is spent. How much would a $3 hamburger cost in retirement?
After 30 years at 2% inflation, a $3 hamburger would cost $5.43. At this point, you would be forced to spend the money you saved for almost two hamburgers. Since this happens for most of your other expenses, you would be lacking about half of what you actually need to live on. That’s how seriously our retirement savings needs inflation protection.
The Bank Isn’t Helping Much
You might be thinking that all you need to do to make up for inflation would be to get a high-yield savings account or perhaps a CD, but if you look at CDs and savings accounts these days, they still aren’t doing a good job keeping up with inflation. The basic problem is that the bank is not currently guaranteeing that you will keep up with inflation. They are leaving that risk on your shoulders and that’s not a risk that I’m comfortable taking.
There Is Hope
When I realized what was going on here, I was concerned and I had a hard time finding the information I needed at first. Financial institutions don’t make money on inflation protection. In fact, they usually try to get you to take more risk instead of helping you protect yourself.
Thankfully, I have been successful at discovering methods of saving that are both guaranteed to beat inflation and accessible to the average person. That’s what this site is all about. I’ve discovered some good books and have even developed some spreadsheets to help plan and track inflation-protected savings.
I think you will find the information you need here to protect yourself from inflation even if you won’t be consuming that many hamburgers in the future.
Where to Go From Here
If you want to learn about a good way to save your money with guaranteed inflation protection right now, take a look at my post: I Just Want to Save My Money.
If you want to continue to consider the effects of inflation (and you are still feeling hungry for hamburgers) check out: The Effects of Inflation.
If you want to look at a larger set of options that you have to protect yourself from inflation and learn more about how to think about retirement, take a look at: Think of Retirement as Standard of Living Insurance.