Inflation is rising, and prices are increasing at the highest rate in almost forty years. With volatile food, energy, and gas costs, there’s a growing amount of financial anxiety. So, what does inflation mean for your money? In a period of high inflation, experts say that it’s a good idea to think about hedging against inflation through smart investments. Instead of saving all your money in the bank, think about your investments. The decision between saving vs investment comes down to where you are in life, your goals, and the current economic climate.
Where to Put Your Money During High Inflation
Many households are feeling the pinch with rising inflation. Over time, inflation increases the cost of goods and services and decreases the number of goods and services you can buy with your dollar. If wages stay the same but inflation increases, it will take an increasingly larger percentage of your income to maintain your current lifestyle.
If you feel like you’re paying more right now, you are not alone. Back in December, inflation of consumer prices was up seven percent. This is the highest US inflation rate in almost forty years. Pent-up demand from the coronavirus pandemic as the economy reopened, labor shortages, and supply-chain issues have contributed to rising inflation.
Investing and saving money are crucial parts of building wealth and setting a solid foundation for financial independence throughout your life. While both play a key role in having more money, they are two very different concepts. By understanding the differences and implementing each one at the right time, you can make the most out of your money and create a more secure financial future.
Money Management: What Is Saving?
Both saving and investing accumulate money and wealth but in two different ways. When saving, you put money aside gradually, typically in a savings account. Often, you’re saving for a particular thing, like a holiday, car, or retirement.
The return is usually low with savings, and there is virtually no risk. However, there is no protection against inflation. This means that because the return is low, inflation can chip away at your savings. For example, when inflation is high, the interest you accrue gives you more money. But your money is worth less because inflation is higher.
If you have a short-term goal, saving money is still a good option. If you need the money in the next few years, using a high-yield savings account is a good option. Saving is safer than investing, but it won’t accumulate the same kind of wealth as investing. So, your financial goals will also play a part in whether saving vs investing is the right thing to do.
Before investing, think about having an emergency backup fund of three to six months. If you have high-interest debt, clearing this will likely give a better return. Money savings apps like YNAB (You Need a Budget) can simplify savings.
What Is Investment?
One of the most significant differences between investing and saving is a risk. With savings, there is little risk of losing your funds. With investing, the risk is higher, but you have more potential for long-term gains. Investing involves using your money and making it grow through buying assets that will increase in value (i.e., stocks, shares, property).
The rate of inflation can change depending on world events, wages, and an increase in raw materials like oil. Experts recommend that during periods of high inflation, you should think about how you can hedge against it. An inflation hedge is an investment made to protect the decreasing purchasing power that comes from high inflation.
There are several ways to hedge against inflation. Inflation-hedged asset classes can form part of a diverse portfolio of investments and help you see growth, especially in a time of high inflation. You can hedge against inflation in a few different ways, like:
- Real estate investment trusts (REITs) — allow private investors to profit from real estate without buying a property outright
- The S&P 500 — stock market index that tracks the largest 500 public companies with stocks in all major sectors, including technology
- Bloomberg Aggregate Bond Index — a fixed-income index that measures the performance of the overall US bond market
- Treasury inflation-protected securities (TIPS) — a US treasury bond indexed to inflation
As investing tends to require more complex knowledge than saving, you may want to consider speaking to a financial advisor for help. Whether it’s Bitcoin investing or stocks and shares, there’s a learning curve.
With a diverse portfolio of investments, you’re more likely to beat inflation over time. While investing can give higher returns, it has a higher risk than a standard savings account. Investing looks at the bigger picture. Ideally, you would invest if you don’t need the money within the next five years so that you can ride out any dips. If you’re happy to take the risk, investing will likely result in higher returns than saving.
The 52-Week Money Challenge and Other Ways to Save Money
By Corey Lewis, CPT, CSCS
How to Build Wealth: Saving vs Investing
To achieve long-term financial goals like retiring early, investing is crucial. If you have an emergency fund and don’t have high-interest debt, then investing the extra money you have can help you build wealth over time.
Think of investing as something you do to achieve your long-term financial goals. Of course, there are different levels of risk within investments. But the longer you can invest, the more you can ride out lows and highs and ultimately acquire more wealth.
Deciding whether to save or invest often comes down to your financial situation, your financial goals, and the current economic climate. It’s never too early to invest, since the more time you have, the more money you can make, even with a relatively small starting pot. By looking at your goals and finances, you can start investing and saving in a way that makes sense for you.
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