How Does Inflation Affect Your Savings?

Q: Should I keep money in savings during inflation?

Yes, you can keep money in savings during inflation. A high-yield savings account will allow you to earn interest on your money. Other ways to diversify include purchasing savings bonds and investing in a 401(k), real estate, and/or the stock market.

Q: What are the worst investments during inflation?

While holding cash in a non-interest bearing account during periods of high inflation is one of the worst things you can do, there are others you should also avoid, such as keeping your money in a long-term, fixed interest account. Long-term fixed rate investments (such as annuities or long-term bonds) can provide a negative return once inflation is taken into account. For example, the CPI states that prices have increased by 3% in the past 12 months (as of June 2023). If you purchased a long-term bond with a five-year maturity, the APY may not be enough to combat the rising costs of goods and services. In essence, your money would be worth less than it was when it went in.

Q: Is money worth more during inflation?

No, money is worth less during inflation, which is why inflation is bad for financial security. If you continue to make the same income, but prices continue to rise, you have received a pay cut via inflation. A common benchmark for inflation is gas. If $40 once filled up your car, but you now need $55, your dollar does not purchase as much gas as it once did. Therefore, it is less valuable than it once was.

Lauren WardUpdated October 16, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Inflation affects the value of money. When the cost of goods rises, the value of money drops. Because of this, the impact of inflation on savings can be severe if you don’t take countermeasures. In this article, we’ll discuss the causes of inflation, how it affects personal savings goals, and actions you can take to financially protect yourself against it.

What Is Inflation?

Inflation is an increase in the cost of goods and services and a fall in the purchasing power of money. For example, what once cost $5 creeps up to $6.95. Because it takes more money to purchase the same goods or services, the value of the money has fallen. For many people, inflation tends to hit the hardest in the following categories:

Gas
Groceries
Housing
Utilities
Doctor visits

Inflation is measured by comparing current prices with past prices. The U.S. Bureau of Labor Statistics keeps up-to-date data with its Consumer Price Index, which keeps tabs on the cost of all goods and services in the U.S. As of June 2023, prices had increased an average of 3% over a 12-month period.

Causes of Inflation

A common cause of inflation is supply chain disturbances. If the supply chain is affected, as was seen during COVID, prices can rise quickly for both businesses and consumers. Supply and demand is another common cause, along with political tensions (e.g., the cost of oil rising during the Ukrainian War). Natural disasters, such as wildfires in the U.S. and Canada, can also affect the cost of everyday building materials. When numerous homes and businesses need to be rebuilt, lumber demand exceeds nationwide inventory, which increases its cost for both professional builders and weekend warriors. Recommended: 7 Ways to Save Money During Times of High Inflation

Inflation and Its Effects on Your Savings

Because inflation reduces the value of your dollar, you can’t buy as much with a certain amount as you once could. When this happens, individuals should pay special attention to their savings, including emergency funds and retirement accounts.It’s recommended to have at least three to six months’ worth of living expenses set aside in savings. Should you have had that amount in savings previously, you may need to revisit it and resume contributing to it during periods of high inflation. Those six months’ worth of expenses may suddenly only account for four. Extrapolate the above scenario and apply it to retirement. What may be enough money now may not be in 20 years. It’s important to routinely evaluate your retirement strategy to make sure you have more than enough to coast you through your golden years.Recommended: Guide to Savings Accounts

Short-Term Savings Impact

A common effect of inflation are short-term goals and aspirations. Say, for example, you’ve been saving up for a two-week vacation with your family on the other side of the country. You’ve already booked the Airbnb, but haven’t bought the plane tickets. Unfortunately, each ticket is $200 more than you budgeted. While it’s not convenient, you’re now considering driving for 15 hours. Gas, lodging, and food will all add up, but may still be less than the higher plane ticket costs.

Long-Term Savings Impact

As mentioned, retirement can be hurt by inflation, but another thing to consider are other long-term savings goals, such as a down payment for a house or college tuition. College costs once hovered around $40,000 for a four year degree, but today that amount may not even cover the cost of a single year. In-state tuition is currently estimated to be around $103,000, while out-of-state tuition is around $176,000. Private school? Expect a final bill near $218,000. If you’ve been contributing to a 529 for your children’s college education, you may want to consider putting in a little more each month to cover rising costs across the board. Recommended: The Cost of College Over Time

Protecting Your Savings During Inflation

Despite inflation hurting the purchasing power of the dollar, there are measures you can take to combat its effects. Consider taking the following actions to protect your financial security during these times.

Savings Bonds

A savings bond is issued by the treasury department to raise funds for certain government projects or expenses. By purchasing a bond, you are, in effect, investing in the U.S. government. You can purchase bonds with fixed rates, inflation rates, or combined rates, and with terms as short as four weeks to as long as 30 years.

High-Yield Savings Accounts

Also called a high-interest savings account, a high-yield savings account offers a higher APY than a traditional savings account. Rates vary between institutions, so it’s important to shop around. Opening a savings account is easy, and can often be done entirely online. Online savings accounts also often come with a number of unique benefits, including remote deposits and compounding interest accounts. Recommended: When Will Interest Rates Go Up for Savings Accounts?

IRAs and 401(k)s

An IRA and a 401(k) can be used to help save for retirement. Both offer certain tax advantages, which can help you circumvent inflation. Both are also invested in various financial markets, allowing them to have the ability to bring in significant returns.

Stock Market

When companies incur greater expenses, they often must increase the cost of their goods or services. On paper, this technically translates to greater profits, especially if the company is well managed. This, in turn, can lead to more valuable stocks. When investing in stocks, you may want to consider working with a wealth management firm. It’s important to note that while you can make money in the stock market, you’re also at risk of losing money.Recommended: Can I Get a Personal Loan to Invest in the Stock Market?

Real Estate

Real estate often rises and falls in lockstep with inflation. In December 2022, U.S. home prices grew 8.8% year-over-year, with the average growth rate being 5.4% year-over-year. Real estate can be a wise investment, however, it’s important to note that if interest rates are also high, those rates could negate any potential earnings throughout your time owning the property.

The Takeaway

Inflation causes the value of money to drop. When things cost more, but your income remains the same, your purchasing power has declined. To protect your money, it can be wise to diversify your investments, including utilizing a high yield savings account. If you’re interested in opening a high interest savings account, consider Lantern by SoFi. Lantern allows you to compare interest rates on top savings accounts, including what the minimum balance requirements are and if there are any fees associated with the account.Compare high interest online savings accounts and find today’s best rate with Lantern.

Frequently Asked Questions

Should I keep money in savings during inflation?

What are the worst investments during inflation?

Is money worth more during inflation?

Photo credit: iStock/LCBK0623003

LCBK0623003

About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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