Understanding Savings Accounts and Inflation Risk in Hourly Financial Planning

Discussing savings accounts and inflation at Natural Bridge State Park in Santa Cruz, California

Good morning, I'm at Natural Bridge State Park in Santa Cruz, California right after sunrise this morning and I'm going to talk to you real quick today about savings accounts and kind of the cost of having a savings account.

Watch the video here.

How Hourly Financial Planning Clients Should Think About Savings Accounts

Now you know when you get a savings account you put money in and it protects your money. The idea is that you're not going to lose any principal from your investment, you're always going to have the money that you put in there. But in a way you can actually lose money in a savings account.

So as you know it pays a lower rate than some other things. So maybe you've got a savings account that pays you one percent, but if inflation's at three percent you're actually losing money.

Inflation and the Real Cost of Savings Accounts

So how that works is maybe a loaf of bread costs a dollar this year and you've got a dollar in your savings account and you make one percent on it. So next year you've got one dollar and one cent. But if inflation is at three percent then the cost of the bread is now one dollar and three cents.

So while you haven't lost any actual money, any dollars, what you've lost is your buying power. You can no longer buy as much stuff as you used to be able to buy with your savings. So there's actually a risk to having the savings account because you risk losing real money or your real buying power.

Where Savings Accounts Fit Into Your Financial Plan

So that doesn't mean you shouldn't have a savings account. They've definitely got a place. If you've got to spend money in the next year, you don't want to have it in stocks or something that could be fluctuating. So there's a place for your savings account.

But just realize as you're putting money in there that you could be losing your buying power, and so it's not necessarily the safest long-term place for something just because it has principal protection.