When I was growing up, my mom didn’t drive. My dad was often out of town on business, so every Saturday, my mom and I would walk the mile or so to the nearest grocery store – King’s.
It was literally uphill both ways (not even kidding), and on the way back, we’d have to carry all the groceries, which was no picnic.
I remember for a long time, my mom’s weekly grocery budget was $50, which seems completely absurd to me now. A week’s worth of groceries for 2 adults and 1 nearly-always-hungry child for $50?
That means, with 3 meals a day, 7 days a week, that’s $2.38 per meal for 3 people, or just 79 cents per person per meal. And that’s not counting those fudge-covered Oreos I was always jonesing for. Mmm, Oreos.
These days, it seems like I sneeze and there goes another $50. Aside from impromptu gas station candy purchases, I can’t think of a single substantial thing that costs 79 cents, nevermind an entire meal.
And this is really the crux of inflation. If I had saved a $50 bill from when I was 8 years old and still had it today, that $50 back 30ish years ago could have bought an entire week’s worth of groceries. That same $50 today can only buy a small fraction of that (i.e., the purchasing power of that $50 has gone waaaay down).
So let’s take a moment to face the music. Let’s talk about inflation – what it is, why it’s here, and most importantly, what to do about it – what your options are, things you should consider, and how to prepare yourself and your family for what’s to come.
Inflation 101 – What Is Inflation, Anyway?
At its most basic level, inflation is when prices of goods and services go up. As prices rise, your purchasing power goes down (in other words, that same $100 can’t buy the same thing now that it could a year ago).
One of the clearest examples of inflation can be seen in the price of milk. In 1913, a gallon of milk cost about 36 cents per gallon. One hundred years later, in 2013, a gallon of milk cost $3.53 – roughly 10x the price in 1913.
During that time, nothing inherently changed about the milk itself (i.e., it’s not as if the quality of the milk became substantially better), it’s not that the milk became more scarce, or even that that milk was more expensive to make (although things like “grass-fed” and “organic” likely didn’t factor in as much in 1913).
Rather, this price increase reflects the gradual decrease in the value of money as a result of inflation.
Moderate Inflation Is A Good Thing
While many think of inflation as a bad thing, some level of inflation is healthy and keeps the economy strong. A stable economy needs a stable level of inflation; but when inflation gets too high or too low – that’s when there are problems.
When inflation is high (as we’re seeing now) and wages can’t keep up with the rate of inflation, purchasing power for those wages decreases. This can lead to a rise in labor costs (as workers ask for raises to try to keep up with inflation), which results in lower profits for businesses.
High inflation can also lead to higher interest rates, as the Federal Reserve raises rates to try to cool the rate of inflation – and this is exactly what we’re seeing now.
High Inflation Creates Economic Uncertainty
Altogether, these effects of high inflation can create extreme economic uncertainty, which is exactly where we are now.
But just because there’s fear and uncertainty out there doesn’t mean that you should sit back and do nothing. In fact, great fortunes have been made and lost during times just like these in the past.
And while there’s no one single “right” or “best” path for you to take, depending on your unique situation, it’s critically important that you understand the landscape, as well as your options, so you can make a conscious decision on the best course of action, before inflation and high interest rates degrade the wealth you’ve worked so hard to create.
So let’s talk about the options ahead of you, as well as the pros and cons and short-term and long-term impact of those options.
Option #1 – Do Nothing And Keep Your Money In A Savings Account
The simplest and easiest course of action would be to do nothing, and this is the course of action many are choosing right now, mainly because they’re scared and not sure what to do.
Even if you do have some of your money in a diversified portfolio of investments, I’m guessing that you have a certain portion of your savings (not counting your emergency fund, which you should keep liquid) that’s sitting idle in a bank account.
As of the week of May 18, 2022, the national average interest rate for savings accounts if 0.06 percent. Yes, you read that right – for all intents and purposes, that’s essentially zero.
Of course, this is an average, so you can find interest rates that are higher (or, believe it or not, lower), including these rates, as of this writing:
0.01% at Chase
0.05% at Citibank
0.35% at BMO
0.60% at Capital One
0.60% at Ally
0.72% at CIBC
Okay okay, I’m getting depressed writing this. If you ever thought you could save your way to wealth, I hope these numbers give you the wake-up call you need.
These numbers mean that if you had $100,000 in a savings account today at Chase, in one year’s time, assuming you spent nothing, you would have earned in interest…
…wait for it (because percentages and math can sometimes be hard)…
…not $1,000,
…not $100,
…but $10.
That’s right. If you were to put $100,000 into that savings account today, it would be $100,010 in one year. Yes, that’s right. The bank gets to leverage your $100k for a whole year and tosses a mere ten bucks your way.
Outraged? So am I. And this is exactly why your savings account is NOT the best tool in your tool belt right now. It may give you a (false) sense of security in knowing that the number in the account will be the same day in and day out, but with inflation on a rampage at 8%+, that means your money is losing significant value every day that it’s sitting there.
So if leaving your money in savings won’t do, what other options are available? Let’s take a look at a few other options.
Option #2 – Put Your Money Into A CD (Certificate of Deposit)
There’s nowhere to go but up from those abysmal savings account rates, so let’s forge ahead. Our next stop is a CD, or certificate of deposit. A CD can be a great alternative to a savings account in that you aren’t taking on additional market risk.
Your money is locked in for a set amount of time, and in exchange for that lower liquidity, you get higher rates than you would with a savings account. But the question is, are CD rates high enough to match or beat inflation?
Here are the rates for CDs, as of today (May 24, 2022):
1.01% at Citibank for a 5-year term
1.30% at Capital One for a 1-year term
1.70% at CIBC for a 2.5-year term
1.75% at Ally for a 1.5-year term
2.00% at Capital One for a 2-year, 2.5-year, or 3-year term
2.00% at Ally for a 20-month, 3-year, or 5-year term
The highest CD rate I was able to find was 3.21% for a 5-year term with a minimum $5,000 deposit at Connexus Credit Union.
Even with that 3.21% annual rate over 5 years – which is substantially better than the 0.01% annual interest rate you’d get with a Chase savings account – you’re still significantly below the 8%+ rates of inflation we’re seeing of late.
And don’t forget – you will owe taxes every year on the total interest accrued for your CDs, which brings that rate of return down further.
So while we’re moving in the right direction, we’re not quite there yet.