Inflation: what it is and how it affects your savings
Inflation is the general rise in prices. If prices go up 3% in a year, the same money buys a little less than before. Your balance doesn't change, but it's worth less.
This article is for information only and is not financial advice.
How much it adds up over time
With average inflation of 3% a year, 10,000 kept for ten years without earning anything would have the purchasing power of about 7,440 today. You've lost a quarter without seeing a single transaction on your account.
Nominal and real returns
If your account pays 2% and inflation is 3%, your real return is roughly −1%: you gain money, but lose purchasing power. When comparing options, always think in terms of return minus inflation.
What to do with each part of your savings
Not all your money needs to "beat" inflation. It depends on when you'll need it:
- Emergency fund: it must be available immediately. Losing a little purchasing power is the price of peace of mind. An easy-access savings account with a decent rate reduces the loss.
- Goals a few years away (a deposit, a car): fixed-term savings or low-risk products with terms that match the date.
- Long term (five to ten years or more): this is where diversified investing, such as index funds, has historically beaten inflation, with falls along the way and no guarantees.
Your salary counts too
If your pay rises more slowly than prices, you earn less in real terms every year. Reviewing and negotiating it is as much a part of protecting yourself from inflation as saving is.
Review your fixed costs
Inflation also creeps into your bills: insurance, subscriptions and utilities go up every year. Comparing them once a year offsets part of the rise.
With MonVault you can see your full net worth (accounts, savings and investments) in one place, and track your investments alongside the rest of your money.
