Hi guys, I’m back with another timely topic that will help you make or break your life. We all like to be wealthy. The first thing that comes to our mind to become rich is to save more and more money for future use, cutting down unnecessary consumption. Isn’t it? But, do you really think this time is the best time to save your money? I don’t interfere with your decision; you can make the final call after reading this article. Hope this piece of work will help you make an informed decision on your savings and to know why 2022 is not good for savers.
WARNING! This will be a bit of a boring article for those who hate number crunching. Nevertheless, you will be informative even to guide your colleagues for the betterment. Anyways guys, read this and thank me later.
Let’s explore reality together…
I guess no offence if I say Covid 19 pandemic not only hit our health but always our finance. This global pandemic made everyone feel miserable and adapt to a lifestyle we had not faced before. Lockdowns, Face Masks, Work from Home Policies are entirely new concepts for some nations. But, be glad to God because we are still surviving with all this crap… Getting infected with Covid 19 has become a new normal, and five years down the line, it will be a super-duper normal disease like a usual cough or cold with the invert of new medicine for it…
But guys, how will we find solutions for the financial burdens we are suffering right now?? Expenses are going above the roof with the rising inflation. Here is how inflation has been moving throughout the past few years…
Source: Federal Reserve Bank of Minneapolis
Now you must be wondering whether there is a real impact on inflation on your savings. One must be thinking I have bonkers to relate savings to inflation. So let’s see how this will affect your savings big time.
Let me make your life easier by explaining this to you with a simple example. Imagine you have got $10 000 with you, and you keep that inside your locker to use it 20 years from now. Will that money is able to buy as much 20 years into the future?? Here is a big NO to this question because inflation will swallow up your purchasing power.
One might argue that this won’t happen if you keep it in a bank as you are paid with interest over time. Of course, yes, you can balance out the effects of inflation from the interest you earn, but which guarantee you get that it will entirely cover the loss incurred due to inflation. So there is risk involved in bank savings owing to inflation.
This applies to all other investments as well. The below graph shows how real interest rates have diminished over time.
The yield on inflation-protected treasury bonds
*Recessions are indicated by grey colour
Source: Federal Reserve
Looking at this, you have got two options…
Option # 1
You can invest in safe assets, but the return on investment will be low due to less purchasing low.
Option # 2
You can also invest in risky assets, which gives you a high return on investment as long as you are lucky enough to be away from negative market sentiments.
If you prefer to follow option # 2, I must say that you have a great gut to take that risk, even to lose your entire invested money.
Having said the dark side of inflation, now let me tell you the bright side of it as well. The main reason why I did not want to say this first is that inflation is not really a good thing, so I don’t want to promote that by saying the good first.
However, inflation rising over interest rates is good if you borrow money at a fixed rate to build a house, buy a machine, or expand your business’s premises that will reap you an income over the years.
But if you need liquid cash in another five years down the line to pay donations for your kid’s school or anything better to keep that money saved in a bank with less or zero interest.
If banks offer you low-interest rates, where should you invest money this time? Because just keeping money with you doesn’t sound any good unless you need it immediately. Here are some top five places where you can invest your cash…
- High-yield savings account
- Certificates of Deposit
- Government bond funds
- Short-term corporate bond funds
- Municipal bond funds
But none of the above financial instruments guarantees 100% inflation cover on the purchasing power.
On the other hand, according to some economists, safe investments which yield a poor return on investments are sky-high real estate, meme stocks, cryptocurrency values. During Covid 19 pandemic, Americans have gathered trillions of Dollars in extra savings. This has made them invest in various assets, resulting in asset prices going up and expected returns going down.
However, officials at Federal Reserve wishes to maintain an easy monetary policy for two main reasons;
- To bring the American job market back to full employment.
- To establish credibility that the 2% inflation is symmetric meaning it won’t affect even if prices go up.
Another reason interest rates have gone down is due to certain demographic factors such as lower fertility and longer life expectancy. As people age, the critical mechanism is to store increasing assets, particularly safe ones, and then spend those savings slowly until they retire.
In this article, I have discussed why and what has made you not to save at this time in detail. Hope this article will be helpful to you when creating your savings decisions. The best is to invest in an asset that will bring you economic benefits into the future. Thereby, you can earn a good return on investment when everything gets back to normal.
See you soon with another informative yet easy-to-grab article…