Inflation Losses vs Savings

tax deductionsWhat is inflation? I remember a time in the 1980s when a student could go on the bus for less than a dollar or when a McDonald’s Big Mac was $2.50. Now $2.75 gets you on a bus and a Big Mac gives you indigestion for $6. Inflation, is the rising cost for goods and services. As more people demand the service or product, the more it costs to create or maintain it.

Inflation knocks your money down 2% about per year! Your typical savings account gives you 0.6 – 0.9% yearly. So this means… you’re losing value by keeping it there.

How to Counter inflation?

Don’t get me wrong, I think a savings account is good for emergency purposes  but to beat inflation you’ll need to grow your money faster than it. Here’s two things you’ll need – time & a good strategy. Here’s what the rich use to stay on top.

Your Savings Account vs Inflation

Your bank person says that your savings account has a 0.9% annual interest rate. They say it has daily compounding interest which may sound awesome… They aren’t totally lying but it just sounds a lot better than it is. Now comes the arithmetic!

I’ve done the first equation for you!

A $1000 held for one year in a savings account at 0.9% annually will be approximately
$9.04 – minus taxes.

For the equation you can go to

To Figure Out In a Month

Take the percentage as a decimal.

0.9% = 0.009

Then take the number of days in a year = 365

The interest is compounded daily = interest as a decimal / days in a year

0.009/365 = 0.00002465 This is how much you gain daily!

So if you get 0.00002465 after 30 days for $1000 = $0.73 approximately

In a tax free savings account you don’t need to pay any taxes on this $9.04 of earned interest… So good right?


What Your Money Looks Like Realistically

Let’s say you have $1000 and leave it in a regular savings account.

Money:                     $1000
Interest Gain 0.9%:        $9.04
(Taxes 26%):                  $2.34
(Inflation 2%):             $20
Net Profit/Loss:        $986.70 (Inflation eats away so much of your spending power for future years)

Now look if you place it in a investment vehicle like an equity mutual fund with average 7% return for one year.

Money:                                                 $1000
Interest Gain 7%:                                     $72.29
(Taxes 26% with capital gain):                  $9.40
(Inflation 2%):                                         $20
Net Profit/Loss:                                   $1042.89

So you made about $42.89 with a mutual fund vs a safe investment. A “safe” investment actually isn’t safe when you ONLY put your money in savings or low interest bearing investments. Mind you these accounts are good for people who want:

a) an emergency fund
b) a place to put their money before making a large purchase
c) a temporary liquid investment

So start winning with an educated financial planner. Not all banking financial service managers are good and some do not have enough background to speak to you about all of the options available. Look for alternative solutions with a good track record. This way you can beat taxes and inflation without being beat down with jargon.

Got a question? Contact me and I’ll help out!