Time is money, but time is not money’s friend — at least not in the current inflationary environment. When inflation is up, the purchasing power of the dollar goes down, which not only affects the cost of goods and services but also impacts your savings and investment earnings.
The goal is to have your investments keep pace with or ideally outperform the current inflation rate in order to grow your money. Considering inflation now is at 6.2%, it’s downright intimidating to conceptualize how to keep your investments caught up with the speed of inflation, but the good news is, it’s totally achievable if you know where and what to invest in.
How does inflation work?
Inflation quantifies the purchasing power of money as it relates to the increase in goods and services, which naturally changes over time. The Federal Reserve’s goal is 2% inflation per year. But we know, things aren’t always ideal. The historical average inflation rate from 1913 to today is 3.10%, but today’s inflation rate of 6.2% is the highest level in the past 20 years. Inflation rates can be accelerated for certain goods, depending on supply and demand, which drives the cost up. For example, right now the cost of energy in the United States is up 30% since last year, and food costs have risen over 5%.
Inflation has jumped up to historical highs thanks to current Fed policies, which as of October 2021 have increased the national debt by over $3 million a minute over the past year, bringing the national debt to a record high of $28.91 trillion. That’s an astronomical amount of debt, and accelerated printing of money has accelerated the speed of inflation.
For those who may need help conceptualizing the size of the current national debt: If you were a military jet flying at the speed of sound, you could drop a trail of dollar bills from the earth to the sun, and you would have $1 trillion, and it would still take 14 years to do so. But that’s just $1 trillion. Now multiply that 28 times.
Why high inflation is bad
Some inflation is inevitable and “normal” by most accounts, but the current rate of 6.2% is not normal, and it means people have to work extra hard not to lose money. Let’s say you have $100,000 sitting in a savings or investment account for retirement. Given the current inflation rate, the purchasing power of that $100,000 is really $93,131. If your money isn’t growing at the same pace or even surpassing the 6.2% annual rate of inflation, you are, metaphorically speaking, pouring your money down the drain.
How to invest to keep pace with inflation
Thankfully, there are ways to combat an inflationary market, particularly by investing and earning more than the current rate of inflation. Investing in profitable real estate, sound dividend-paying real estate investment trusts (REITs) or stocks, or even tying your funds to a store of value like cryptocurrency will keep your dollars growing while being backed by something that retains its value. Since REITs often pay solid dividends, searching for high-dividend paying companies like mortgage REIT Annaly Capital (NYSE: NLY), which pays a roughly 10.5% quarterly dividend return, can help your money grow despite high inflation.
High-dividend-paying stocks or REITs are a great place to start, but it’s important to know the risks involved before investing, since high-dividend companies also come with risk. Keeping up with inflation isn’t worth investing in a bad stock or REIT. You should always do your due diligence before investing, or you could end up losing far more than you would by not keeping up with inflation.
The post Inflation Is Eating Away Your Savings: Here’s How You Can Keep Up appeared first on Motley Fool
Original source: Motley Fool
