👨🎓 How inflation affects your savings
**8/52** Macro Mornings Education
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👨🎓 This is part of a 52-week series on macroeconomics designed to build your knowledge step by step. Feel free to catch up on previous emails here if you'd like to start from the beginning!
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Dear all,
In our last email, we discussed the causes of inflation.
Today, let’s talk about how inflation directly impacts your savings and what you can do to protect your hard-earned money.
As we mentioned earlier, inflation erodes the purchasing power of your money over time.
This means that the value of your savings decreases if the interest you earn doesn’t keep pace with inflation.
Let’s take a closer look at how this works with some simple math.
Imagine you have $10,000 in a savings account earning 1% interest per year.
At the end of the year, your account balance would be $10,100.
However, if the inflation rate is 3%, the real value of your money has decreased.
After a year, you would need $10,300 to buy what you could have bought with $10,000 at the beginning of the year.
So, even though your nominal balance has increased, your real purchasing power has declined by $200.
This scenario highlights why it’s essential to consider inflation when saving for the future. Here are a few strategies to help protect your savings from inflation:
Invest in Inflation-Protected Securities: Consider investing in assets like Treasury Inflation-Protected Securities (TIPS) in the U.S. or similar products in other countries. These securities adjust with inflation, helping to preserve your purchasing power.
Diversify Your Investments: Stocks, real estate, and commodities often outpace inflation over the long term. For example, historically, the stock market has provided returns that exceed inflation. A well-diversified portfolio can help protect your wealth against inflation.
Real Estate as a Hedge: Real estate can be a good hedge against inflation, as property values and rents tend to rise with inflation. , if you own rental property, you can increase rent in line with inflation, preserving your income’s purchasing power.
Consider Alternative Investments: Assets like gold or commodities often hold their value during inflationary periods. For example, during periods of high inflation in the 1970s, gold prices surged as investors sought to protect their wealth.
By understanding how inflation impacts your savings and taking proactive steps to hedge against it, you can better preserve your purchasing power over time.
In our next email, we’ll explore how to adjust your investment strategy during periods of high inflation.
Alessandro
Founder of Macro Mornings
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