Have you checked CNN lately? The world is an unpredictable place.
The uncertainty surrounding the world is why saving is so important.A buffer against the randomness of the world provides peace of mind.The more of a buffer you have, the more turbulence in life you are prepared for.
There are countless emergencies and planned events in life that we must save for.A brief and far-from-exhaustive list is below:
Inflation Is The Enemy of Your Savings Account
Inflation is the increase in in prices and fall in purchasing power of money.When inflation occurs, the value of your savings decreases.
Inflation is a hidden wealth tax.If your money is not growing, its shrinking.If we lived in a deflationary environment, money would be worth more over time.There’d be less incentive to generate a return on your investment.
That, however, is not the world we live in.
The Federal Reserve has a target inflation rate of 2% a year. Every year your money loses 2% of its value (if the Federal Reserve hits its target).The average historical inflation rate in the United States is 2.25%.
Approximately every 36 years (at 2% inflation), your savings lose half their value if they are not earnings a return.Obviously, this is not an ideal situation.
Make Your Money Work For You to Fight Inflation
The highest national savings accounts are currently paying interest of 1.1% a year.With inflation expectations of around 2% on average, this will result in declining purchasing power.
Fighting inflation is just one reason to make your money work for you. Even with no inflation, it is more beneficial to have your savings account grow in value rather than stay stagnant.
Over a long period of time, your savings have the potential to generate more income than you can in your normal life if invested wisely.
The mathematics behind compounding your savings are very compelling.They are most easily understood using something called ‘The Rule of 72’.
