How Inflation Affects Your Savings

Written by Catherine Rein (last updated April 24, 2009)

Inflation happens when prices increase for things like labor, production and debt payments. As these prices rise, the price of all products and services go up. If your savings are not in inflation-protected investments, the money will be worth considerably less when you finally take it out of savings and try to spend it. You should consider the following when looking for ways to protect your savings from inflation:

  • Causes of Inflation. Inflation has many causes including when the government prints excess money to deal with a crisis, when production costs rise, when labor costs rise and importantly when international lending and national debts increase. The federal government can also cause inflation through increased federal taxes on consumer products such as cigarettes or fuel.
  • How Inflation is Measured. The most recognized way of measuring inflation is through the Consumer Price Index (CPI). The CPI looks at the average change in prices over time paid by consumers for a "market basket" of consumer goods and services. The CPI is determined by the Bureau of Labor who surveys about 7,000 families from around the country on their spending habits and regular expenditures.
  • One way to measure the impact of inflation is through the Rule of 72. Divide 72 by the inflation rate. This will give the number of years it will take for costs to double.
  • Protecting Savings from Inflation. Treasury Inflation-Indexed Securities (TIPS) are one strategy for protecting savings from inflation. The U.S. government uses the CPI index to adjust the value of your principal every six months to account for inflation. As an example, if the CPI went up 3%, the principal on the investment would go up by 3%. You can invest directly in TIPS through the government or there are also funds that invest in TIPS for you.
  • Other ideas for protecting your savings include index funds, which are easy to invest in, have low costs and provide easy diversification. Individual stocks are also a great choice, since company stocks will often rise with inflation, as they are able to pass along price increases to their customers.
  • Remember to factor in inflation to your savings and investing plan. If you ignore the affects of inflation your investment return will be significantly less and your savings dollar will not go as far when you finally pull the money out.

    Author Bio

    Catherine Rein

    MORE FROM CATHERINE

    What is a Hedge Fund?

    A hedge fund is an investment fund that seeks to limit risk by hedging their investments using a variety of methods, most ...

    Discover More

    Ways for Teens to Make Money

    Teens have a number of ways to make money, both traditional and newer online job opportunities. You can find work through ...

    Discover More

    Getting Rid of Red Eyes

    Red and inflamed eyes can have many causes. You can reduce the inflammation and prevent any infection from spreading to ...

    Discover More
    More Money Tips

    Saving Money

    The premise of saving money is simple. Spend less. How can you cut monthly expenses to find money to save?

    Discover More

    Savings Accounts for Children

    Savings accounts are a valuable teaching tool for children and it can be used to foster a savings mindset that will serve ...

    Discover More

    Health Savings Plans

    Ecclesiastes says that there's nothing new under the sun. That may be true, but Health Savings Plans are still an ...

    Discover More
    Comments

    If you would like to add an image to your comment (not an avatar, but an image to help in making the point of your comment), include the characters [{fig}] (all 7 characters, in the sequence shown) in your comment text. You’ll be prompted to upload your image when you submit the comment. Maximum image size is 6Mpixels. Images larger than 600px wide or 1000px tall will be reduced. Up to three images may be included in a comment. All images are subject to review. Commenting privileges may be curtailed if inappropriate images are posted.

    What is nine minus 5?

    There are currently no comments for this tip. (Be the first to leave your comment—just use the simple form above!)