It seems safe to park your cash in a regular savings account. Once you log in, you find that your balance is still there and therefore assume your money is secure. In fact, however, that balance is gradually losing purchasing power each and every day as a result of a subtle financial danger: inflation.
The Hidden Cost of "Safe" Savings
Because of inflation the prices of goods and services increase over time. If the rate of inflation exceeds the interest rate (annual percentage yield) provided by your bank, then your real rate of return will be negative.
If inflation is 3.5 per cent and your ordinary bank only offers an APY of 0.41 per cent, you are in effect losing more than 3 per cent of the value of your money each year. You might have the same dollar amount, but that amount of money will buy considerably less groceries, fuel and housing than it did a year ago.
How to Protect and Grow Your Wealth
To stop inflation from eroding your hard-earned cash, move beyond basic savings accounts and consider these higher-yielding alternatives:
Online banks usually provide APYs that are 10 to 21 times greater than those offered by traditional physical banks, yet they still offer FDIC insurance and full liquidity.
If you don't need immediate access to your money, you can get fixed and guaranteed returns by investing in government-supported Treasury bills or bank certificates of deposit.
For long-term objectives (those five years or more in the future), broad-market index funds have in the past provided returns that have comfortably exceeded inflation.
It is important to keep your emergency fund accessible, but if you leave your long-term capital in a low-interest account it will definitely result in a loss. Move your funds around now so that your money can work just as hard for you as the effort you put in to earn it.
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