Saving money is not just about setting cash side. If you just put your money in a mattress, eventually that money will become worth less. How can that be? The answer is inflation. Inflation, simply put, is the tendency of prices to rise over time. When prices rise, the money you have becomes insufficient to buy a specific amount of goods. For instance, if $100 buys you 100 beans today, but the same 100 beans cost of $105 tomorrow, then inflation has made your money is worth less than it was. Unless you can find a way to make that $100 grow into $105, you are losing money. That’s why it is vital that the money you save earns at least enough to keep up with the case of inflation.
TIPS for Beating Inflation
If you feel uncomfortable with the risks of investing, there are ways to keep up with inflation with strategies that don’t involving buying and selling stocks. One easy way to stay in the game is to buy treasury inflation protected securities (TIPS). These are special government-issued bonds that adjust periodically to account for inflation. There is always some possibility of a default, since no investment is 100% secure. Still, most would agree that TIPS are a safe way to keep your money from losing value over time.
Index funds are a little safer right now than in the past. They are funds based on the overall performance of the stock market. Anyone holding these funds just before the real estate debacle weren’t too happy. However, now that the market is at a low, the chances of losing money from an index fund fall significantly. In addition, when you look at the market from a long-term perspective, you see that it has increased steadily at a rate of about 8 percent. It’s a good bet than an index fund, held for the long term, will at least keep up with inflation.
Certificates of deposit are yet another way to keep your money working for you without risking too much. The typical rate of return is about the same as inflation. However, be careful to double-check your calculations. Be sure the money you earn from your CDs will be enough to cover rises in inflation.
Money market accounts are another good way to beat inflation. They pay a little more interest than traditional savings accounts in exchange for maintaining a large balance in the account. The reason a money market account is better than a traditional savings account is that traditional savings often pay only a fraction of what you would need to cover inflation.
High Yield Savings
High-yield savings accounts are any savings account that earns better than average interest. They are typically held at online banks. These banks can pay better interest rates because they have lower costs and traditional brick and mortar banks.
One of these financial products is not the answer for most people. Many prefer to use a combination of them to reduce the risk of losing money even more. Whatever you do, don’t leave your money to waste away in a traditional savings account, which is just about as good as leaving it in a mattress. Both guarantee you will lose money because of inflation eventually.
Jessica Bosari is an Internet copywriter and blogger for various publications and her own blog. You can read more of Jessica's work here. If you have any comments or questions about SavingTools or about saving money, leave your comments in the form below or email firstname.lastname@example.org. Thanks!