Why Inflation Is Eroding Your Savings
The basic principle
behind inflation is that as the money supply increases, so too does the
relative price of goods and services. A common sentiment for children to hold
is “why can’t we all be millionaires, then there would be no poor people”, or
something to that effect. The answer is inflation. In theory we could all be
millionaires, but this would drive up the price of consumer goods to reflect
the increase in money supply, essentially balancing out society’s new found
wealth.
The example
of wage parity shares a common connection with how savings are affected by
changes in inflation. Your savings must also increase at the same rate of
inflation each year in order hold their real worth. If prices are rising
annually but your savings remain unchanged, you are able to purchase less with
the same amount as you were the previous year. This is why keeping your savings
hidden under a mattress is not the smartest investment strategy, even if you
ignore the security issues. What the vast majority of us do instead is deposit
our savings into the bank.
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