The effects of inflation on your savings

The effects of inflation on your savings
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Inflation can affect your savings in various ways, especially when it comes to cash investments like savings accounts. Many people prefer keeping their money in savings accounts for convenience rather than investing it. However, as time passes, the value of money in a savings account may decrease due to rising prices. What Rs.10,000 could buy 25 years ago isn’t equivalent to its value today. In simple terms, the money you keep in a savings account may lose its buying power over time.

Let’s take an example: If you have Rs. 1,000 in a savings account with a 4% interest rate, you’d have Rs. 1,040 at the end of the year. However, if the inflation rate is 5%, you’d need Rs. 1,050 in the account to maintain the same purchasing power. It’s important to note that the interest earned in a savings account typically doesn’t keep up with inflation.

Inflation reduces the value of money, and the returns from savings accounts may not be enough to offset this loss. This is especially concerning during retirement when your earning potential might be lower. To protect your savings from losing value due to inflation, they need to grow at a rate equal to or higher than the inflation rate. One effective strategy is to invest a portion of your savings in options like mutual funds, the stock market, or other avenues that offer returns higher than the inflation rate. This helps your savings grow and maintain their purchasing power over time.