Inflation and Your Savings: Things You Need to Know

You often hear the term “inflation” mentioned by financial experts, politicians, and in the news. However, it’s closer to home than you might think: every day, this factor is the cause of the actual reduction of your income and savings. The Payday Depot team explains why this happens and what you can do to protect yourself.

What is inflation, and how does it erode your earnings?

Inflation is the phenomenon of a decrease in the actual purchasing power of consumers, in other words, the devaluation of money. Over time, you’ll find that for the same amount you have in your wallet, you can afford significantly fewer purchases because goods in the market become more expensive.

Financial experts define inflation in terms of annual percentage. This value is used for recalculating state social payments (indexation). However, it typically does not affect salaries and savings, so you need to take care of these aspects yourself.

Why does it happen?

Inflation occurs to a greater or lesser extent annually and varies in different countries. This phenomenon is observed for several reasons:

1. Demand for goods exceeds supply.
2. The central bank has issued more paper money than it has in gold and foreign exchange reserves and the GDP.
3. If the cost of goods increases during production, logistics, and other stages, these expenses are transferred to consumers’ shoulders and wallets.
4. Seasonal phenomena, catastrophes, geopolitical changes.
5. Changes in the volume of imports and exports of products.

Impact on Savings

Inflation effectively erodes your savings because it increases the cost of a basket of goods, rent, clothing, and more. This is a dangerous phenomenon because when you have a deposit in a bank that earns you a certain percentage of interest but the inflation rate is higher, the difference between them is the amount by which your savings have decreased over a selected period. This is critical for both regular deposits and pension savings. The only way out is to choose banks that offer deposit rates exceeding the inflation rate.

How to protect your savings from the negative impact of inflation?

The impact of inflation cannot be completely eliminated, but you can reduce its negative consequences. This does not apply to short-term income that you operate on a monthly basis, but in the context of long-term savings, you have several tools to help contain and minimize risks.

• Try to set aside funds every month for unforeseen expenses such as emergency car repairs, medical bills, or a change in employment. This allows you to effectively manage your monthly budget without touching the dividends earned on your bank deposits and investments.
• Explore various savings options, such as precious metals, government bonds, and bank deposits.
• Discover the benefits of investing so that your money can generate more income. Long-term investments in real estate and securities tend to outpace inflation. You can invest on your own or with the help of brokers. It’s also advisable to diversify your portfolio and hold savings in different assets so that when some depreciate, others continue to appreciate in value.

Route Check: Why It’s Important to Review and Evaluate Your Savings Strategy?

As the years go by, not only does inflation increase, but so does your financial literacy. Regularly revisit your savings to ensure you have chosen the most effective strategy to protect against inflation. This will provide you with confidence in tomorrow, financial freedom, and the ability to achieve your financial goals.

Nitesh Kucchal

Nitesh Kuchhal, an IIM Calcutta graduate, is more than an educator—he's a mentor. With a passion for leadership and entrepreneurship, and travel. He has explored over 20 countries. Beyond teaching, he dives into psychology and discusses social issues. Though he is not a history expert, he enjoys learning about it through books, adding a historical touch to his many interests.