Potential Threat to Your Financial Growth: The Impact of Stagnant Savings on Wealth Over Time
Smarter Ways to Manage Your Money:
In today's world, working hard for your money is just the first part of the equation. Allowing your savings to deteriorate isn't the wise choice, as inflation and lack of interest rob you of their value year after year. So, it's time to explore some savvier alternatives.
How Inflation Affects Your Money
Let's face it; most of us are not earning 3% or more on our savings. Many of us have our savings sitting in a regular old bank account, earning close to nothing. Keep in mind that at an annual inflation rate of 2.4%, according to the Consumer Price Index (CPI), if your savings aren't earning at least that much, you're steadily losing ground.
What to Save and Where to Put It
So, what's the solution? Financial planner Rachel Elson, of Perigon Wealth Management in San Francisco, advises starting with an emergency reserve of three to six months' expenses in a checking or savings account. After that, she suggests a high-yield savings account, preferably with Federal Deposit Insurance Corporation (FDIC) coverage, for spending beyond a month or two. High-yield accounts, found mostly at online banks, offer interest rates that can surpass 4%, a significant difference when compared to the average interest rate of 0.41% for savings accounts in general.
If you're aiming for a higher return, consider a money market account. This hybrid between a checking and a savings account typically has a higher annual percentage yield (APY) than regular savings accounts. For short-term savings goals, like a vacation, leaving the money in a high-yield account could be a good option, as it won't lose money like the stock market could over an 18-month period.
Investing for the Long Haul
For long-term goals, consider investing in index funds or exchange-traded funds (ETFs). Another option is contributing to your 401(k) or Health Savings Account (HSA) at work, or funding a Roth individual retirement account (IRA) on your own. Roth IRAs have the added benefit of allowing you to take out contributions tax-free and for any purpose. However, earnings cannot be withdrawn penalty-free until age 59 ½ or under specific conditions.
The key takeaway is to find savings and investment strategies that offer higher returns than traditional bank accounts, and keep pace with inflation. These strategies can help your money grow while safeguarding its purchasing power over time.
Upgrade Your Finances TodayGet started with a high-yield savings account, or explore investing options with Pepperstone Wealth Management.
- To maintain your personal finance's purchasing power in line with inflation, consider investing in index funds, ETFs, or contributing to a Roth IRA, as these strategies can offer higher returns than traditional bank accounts.
- When it comes to short-term savings goals like a vacation, leaving your money in a high-yield savings account could be a safer option compared to investing in the stock market, as it can help you earn higher interest rates and prevent potential losses in the short term.
- In the realm of digital finance, Initial Coin Offerings (ICOs) allow you to invest in tokens and participate in innovative trading platforms, opening up new opportunities for personal-finance management by diversifying your liquidity and investment portfolios.
