Why Inflation Will Destroy Your Savings and 4 Simple Steps to Prevent It

The biggest reason to invest? You'll lose money if you don't.

You thought investing was the risky one, right? It's true, there's a certain amount of risk involved. But let me tell you about a guarantee-if you don't invest, even a little, you're going to lose money.

How? Inflation.

Let's take a quick example. My savings account offers .20% APY (annual percentage yield-which means "yearly interest"). It's not even a decent rate like 2.5%. I find this quite embarrassing. Here's why: 

Assume that you have $10,000 in that savings account for 20 years. At 2.5% you'd have just under $16,500.

That's not bad, is it? You've made $6,500 on the deal. Good for you. But here's where it gets ugly. According to Stanford University's Hoover Institution and other sources, inflation in the 20^th century has averaged about 3%. In other words, every year a dollar was worth 3% less than it was the year before. And there's no reason to think something similar won't keep happening.

So? Let's run those numbers again. In 20 years at 2.5% interest and an average of 3% inflation, the buying power of your account at $10,000 would be about $9072.00. Because of inflation you would have essentially lost $928!

But if you're like me, you spent years in an account that pays .20% interest and didn't realize it. At that rate, the $10,000 would grow to $10,407.69 in 20 years. But with 3% inflation that would only be worth $5,762.49 in today's dollars (its "real" value).

You would have lost $4273.51.

Let me say that again. You would have lost nearly half your money! Another 5 years and you would have lost more than half.

Now I'm all about saving money. I think it's great if you're stashing some in the bank. But stash wisely. Here's four steps to do so.

Step 1 - find a better savings account.

Make sure it's one that pays better than average inflation. If, for example, you save that $10,000 in an account that pays 4.3% APY, you'll have $23,210.59 in 20 years. And that money will be worth about $12,851.14 in today's dollars. That's a $2,851.14 real gain. If you have less to put in the account, at least feel good that you're not losing money.