Effects of Inflation on Savings and How to Combat It

When we save, we often do so with future goals in mind: the things like in retirement, in each and every incidence of fate, traveling, costly purchases, and even investments. Meyer usually discourages the use of predictors for returns or inflation in general. However, there’s a hidden force that erodes the value of your savings over time: Thus, one is able to regard the term inflation to be among the most important in the field of economics as it determines the state of the economy and the increase of prices of necessities and services within the economy.

Inflation can also work in the shadows and the buying power of money is impacted, hence the need to understand what it is and how one can protect oneself against inflation.

In this case, therefore, let me briefly explain what inflation is all about, its effects – be it positive or negative on savings and also the best ways of combating it.

What is Inflation?

According to some scholars, inflation is the general increase in prices of goods and services in a country over a long period. In this respect, it means that holding cash devalues at the rate of inflation whereas when the price level for a general basket of goods and services is the numéraire.

For instance, it impressed my grandparents speaking that to go to the movies they had to spend 25 cents while the same experience will cost me at least 10 dollars up to even 100 dollars or more. That is inflation, the money the people are carrying loses its value and therefore all prices go up.

On the check mark indicated in the figures by the symbol ‘/’ for inflation, the economists make use of the data relating to the Consumer Price Index (CPI) that measures the rate of change in the price of some standard goods commonly known as the ‘family basket’ in the present period relative to an equivalent measure in the corresponding period of the subsequent manufacturing year.

The X-axis, more commonly the horizontal axis in most inflation-related graphs is normally in terms of years while the Y-axis that is more commonly the vertical axis is normally in terms of the percentage change in prices. Yearly may differ; it may even record a 5 price increase at times, or go lower than a 1 price increase as a result of inflation. At times it may exist a situation where there are declines, or more precisely, prices are decreasing and in this process, consumer’s purchasing power is increasing. While it may sound good to come up with a policy that anchors deflation, very little control over it or no control at all over deflation that continues to reduce prices, dismissing employees and reducing buyers’ expenditure in a cyclic manner may lead to economic destruction.

Inflation has numerous impacts on various aspects of the economy; thus, this paper seeks to analyze the impacts of inflation on savings.

Inflation affects savers in that the purchasing power of money diminishes gradually, hence making it unprofitable to save. Let’s illustrate this with a clear example

better illustrate this let me give an example:

Now you have deposited your money in a savings account in a bank with a balance of $10,000, nearly interest-free and free from any charges. If the average inflation is at 2%, in twenty years it means the worth of money shall be able to buy significantly less.

Initially, one hundred percent of the value in dollars can be directed towards the acquisition of a specific amount of goods and services. However, after twenty years as a result of the factor 2%/100 = 0, it reduces to its original size. 02 due to which the purchasing power of the money has decreased. When added to inflation and the clock, it is possible to lose a lot of your purchasing power attached to your Bank deposits.

Combatting Inflation

In case one is in doubt as to whether inflation is a menace in reducing the value of his/her savings, there are numerous techniques on how to ensure that one’s amount of savings continues to grow, particularly within the backdrop of inflation.

Compound Interest and Inflation

Thus, in the battle against inflation, compound interest, and time, one has to be on the side. Interest charges that are made on the principal and the interest computed in the previous periods are added to the total sum. Perhaps one of the ways of building the purchasing power relating to assets is by acquiring assets whose income is greater than the inflation rate.

In this complete tutorial dedicated to compound interest, we have explained what it is and what relationship it has with inflation and the various financial instruments that will help you combat it. We have also incorporated a free excel sheet that will facilitate your target and compound interest calculation.

Decision Making for Investment Instruments

The best strategy to counteract inflation is being in a position to identify the right financial instruments or the structure of investment that will be offering a yield that is as good as or equal to inflation rates of an economy. Thus, joining your money to one of these banks and letting it earn nominal interest that may not be able to compete with the inflation rate may not suffice.

For example, almost all the banks pay probably around 1% returns on average. If inflation is standing at 2%, this is at least an equivalent loss of real purchasing power per annum. It may appear to be a small amount but it is worthy to remember these amounts aggregate and so in the long run you may be a loser.

Investment: Your Best Ally

This particular mobilisation can without doubt be described to be one of, if not the most effective ways through which the occurrence of inflation could be prevented. Even though to some people it may seem a rather complicated process, the process can in fact be a lot easier if the correct methods and understanding are achieved. Here are the key characteristics to consider when choosing an investment vehicle:

Key Characteristics to Consider

  1. Profitability: What may be gained in the investment.
  2. Risk: The investors are equally at risk and anyone of them has a probability of losing just the invested capital partially or fully.
  3. Liquidity: The ability to be transferred to the market, that is the extent of convertibility of the total investment to cash without incurring a cost.
  4. Taxes: The returns on the investment implications whether they are taxable or tax-free.

In most cases, the level of profitability is directly proportional to the risk level and the degree of a company’s liquidity or proportion of assets that can be turned into cash. Therefore, all of these should be varied with regards to monetary goals and the level of risk you have that is acceptable to you.

Managing Investments: Is It More Appropriate to Go Solo on This Project, or Seek Help from Professionals?

You have two primary options for managing investments: this can be achieved by the business owner handling it on his/her own (DIY) or assigning the function to a professional manager.

DIY Investing

This places you in a better role of identifying the investment to put your money in and is most often very cost-effective as you are not paying management fees. However, Wall Street investing means that it demands much of the time as well as sometimes energy, to understand the way the investments and how to manage the investment successfully.

Professional Management

This eases the mind because all the requirements are catered for by a specialist in the market, leaving you with time for other functions. However, they possess an influence on management fees that could definitely decrease your overall income.

It might be worthy of noting that both methods are correct and both might be used alongside the other. For instance, while it would be possible to partly DIY some of the investment, others would most probably require the services of a specialist.

Inflation: Its Opposite

Inflation is the upward and progressive movement of the general price level and the services and products that are available in the market, which has been noticed in most successful business investment plans. Hence, relating to this concept, there is a need to penetrate the best means of fighting the effects of inflation before engaging in the investment.

Here are several strategies to help you invest effectively and combat inflation:


Across the board, different kinds of securities or different classes of securities or even different parts of the geographical location can minimize risk. According to this structure, one cannot be completely dominated by the market or have the portfolio a lot influenced by the given asset class.

Regular Monitoring and Adjustments

Hence, long-term investment avoids frequent check-ups on the stock market; on the other hand, portfolio modification is inescapable at some point. It is sometimes necessary concerning your investment to change or alter your original financial goals and the actual market conditions.

Educating Yourself

Nevertheless, a time devoted to a series of analytical works regarding the issues related to the financial markets and investment can be extremely beneficial for the development of learners’ decisions. It is relatively easy to obtain vital information about investments due to the availability of a large number of easily accessible books, articles, and online classes.

Inflation-Proof Investing

Here are the following measures to practice inflation-proof investing:

  1. Set Clear Financial Goals: Describe where knowledge is needed specifically in terms of the financial objectives that you have set for the business whether as short-term goals in the next couple of months or even in the middle and ultimate long-term goals. It will assist you regarding the way to do it and where to invest the amounts.
  2. Achieve a High Level of Automation in Saving and Investing: Divide a certain easily calculable amount of money to your investment on a monthly basis from the money in your bank account. For this reason, automation helps you to ensure discipline and order when managing your investments under the investment plan.
  3. Choose Inflation-Proof Investment Vehicles: One should buy those assets that in the past have given a prior performance to the inflation rates such as:
    • Stocks: Equities are often more lucrative than other investments, serving to avert inflation.
    • Real Estate: Real estate is usually valued higher when taken with a long-term perspective, offering some protection against inflation.
    • Inflation-Protected Securities: Government securities like the Treasury Inflation-Protected Securities (TIPS) are well adjusted to inflation as opposed to their – Commodities: In a gold or oil market, many inflation could be a risk and is the starting place. The prices often go high and go up with fluctuating risk without prices.

Rebalance Your Portfolio Periodically

Rebalancing to put it another way, involves restoring the original asset allocation and the risk level that we can obtain, this can also help you in realizing your intended financial goals that will provide it to try and improve.

Case Studies: Real-World Examples

To illustrate how inflation affects savings and how effective investment strategies can combat it, let’s look at two case studies:

Case Study 1: Conservative Savings by John

John deposited $50,000 in a savings bank account with an average interest rate of 1%. With an annual inflation rate of 2%, in 20 years John’s savings would only be worth $15,000 in real terms. This illustrates the importance of considering inflation in savings strategy.

Case Study 2: Diversified Investment by Sarah

Sarah invested in various stocks, properties, and TIPS, earning an average annual return of 6%. After 20 years, her total assets grew significantly, maintaining high purchasing power despite an annual inflation rate of 2%.

These case studies highlight the importance of investing in instruments that generate returns higher than inflation to preserve and grow savings.


Inflation is a real force that can erode the value of savings in any economy. However, effective investment strategies can preserve purchasing power and help achieve financial goals.

Awareness of inflation’s impact, choosing appropriate instruments, diversifying risks, and sticking to a plan are practical ways to combat inflation. Start by acquiring knowledge, setting rational financial goals, and selecting the right instruments to beat inflation. Sustainable growth and the security of savings are crucial amidst the challenge of inflation.

Leave a Comment