Why Inflation Is Eroding Your Savings

       The basic principle behind inflation is that as the money supply increases, so too does the relative price of goods and services. A common sentiment for children to hold is “why can’t we all be millionaires, then there would be no poor people”, or something to that effect. The answer is inflation. In theory we could all be millionaires, but this would drive up the price of consumer goods to reflect the increase in money supply, essentially balancing out society’s new found wealth. That scenario is an example of hyper-inflation, where prices rise in an exceedingly rapid fashion. In reality, most modern countries with stable, or fairly stable, economies have an inflation rate in the low single digits

      The example of wage parity shares a common connection with how savings are affected by changes in inflation. Your savings must also increase at the same rate of inflation each year in order hold their real worth. If prices are rising annually but your savings remain unchanged, you are able to purchase less with the same amount as you were the previous year. This is why keeping your savings hidden under a mattress is not the smartest investment strategy, even if you ignore the security issues. What the vast majority of us do instead is deposit our savings into the bank.
 

         But modern investors need to more carefully consider their options when structuring a portfolio. Of course the key advantage of a bank is that you don’t risk losing your investment, but if your value is being eroded from year to year then you have to ask yourself what the point is. The best thing to do is speak to an Investment Adviser, who can help sort through your options and minimise the impact of inflation upon your savings.

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