Understanding Inflation and How to Save During One

"Save for the rainy day" is a famous slogan we are well familiar with. Financial analysts from across the globe argue that it is the smartest path to financial freedom. We would acknowledge that our savings have indeed been really handy when we needed emergency funds. This comes as no surprise that, ultimately, everyone desires to save and works towards it.

However, the challenge or blocker many people don't anticipate when saving money for the "rainy days" is when their funds begin to lose purchasing power.  This means that the value of the money saved in our account begins to lose its monetary power and it can no longer buy as much as it could when it was initially saved. This has come to discourage several persons from saving.

The reason why money begins to lose value after an extended period is Inflation. Inflation centres on the overall increase in the price of goods and services. Let's be real; things are getting more expensive than they were a few months or years ago. Now, a watch that costs about $200 might cost $250 in a year or less. This means that the power of money has deflated, and you would need more money to buy the same item.

Inflation makes it difficult to save. Imagine saving to purchase an item (the watch in this scenario) only to meet your savings goal just to realise a price increase of 25% ($50). This is the reality for almost everything ranging from rent to the price of groceries and even bills. Everything costs more than it used to, which means we have to spend more to access our basic necessities. Yet, our income does not increase at the same rate as inflation. This discourages people from saving as they have to set more money aside to meet their saving goals. Although they aren't losing money in the real sense, inflation results in a smaller net worth because it eats into your purchasing power.

Inflation affects your finances and quality of life. For instance, you would buy fewer food items for the same price than you would normally purchase them leading to fewer food items that cannot sustain your feeding needs. This affects electricity bills, cable subscriptions, rent among many others which ultimately affects the quality of life a person leads. 

Inflation rates vary from year to year and country to country. While countries like Zimbabwe may experience inflation of about 99.3%, countries like Cameroon experienced a 2.3% inflation (2020). In a vibrant economy, an average inflation rate is assumed to be about 2-3%. This means you would have to increase your income by 2-3% to maintain the same net worth, which may not be feasible and very unlikely in countries like Zimbabwe where you would have to consider a 99.3% increase. Although the bank offers interest rates on savings, it is often lesser than the inflation rate, which means you need a smarter way to save.

As you may have realised, Inflation is a constant we can't stop that consistently reduces our purchasing power. However, inflation shouldn't make you miss out on all the fantastic benefits that cultivating a saving habit has to offer you. This is why we have prepared the best strategies to help you push past inflation and achieve your saving goals.

1. Certificate of Deposits

A certificate of deposit is one of the numerous products offered by banks and credit unions. A customer is encouraged to deposit a significant sum without touching for a specific period. As returns, the bank pays the customers a premium interest rate on the funds safely locked in their accounts. The funds earned can be used to mitigate the effect of inflation.

You can earn a passive income with a certificate of deposit when you invest your funds for an extended period between three months to five years. The larger the funds invested and the time frame for investment, the more profit you would earn. However, there is a catch: you cannot withdraw the invested funds before the set date—withdrawal before the set date results in a penalty and loss of interest earned. 

On average, depending on the bank you set up a certificate of deposit with, you would get at least 1.2% interest rate. Typically, banks often offer CDs that range 1, 3 or 5 years and the interest rate is dependent on the period. As such, setting up CDs for a longer period of time offers more profit. This is why it is advisable that you set some funds aside as emergency funds and only set a return date that is convenient for you. It is important to note that taxes are charged on CDS. You can consult your local bank or microfinance banks on the best rates for CDs available in your locality. Therefore, you should take into account the taxes to be paid when calculating your profits. Good practice also employed is CD laddering, in which an individual invests in short-term CDS and uses the profit earned to invest in Long term CDS.

2. Invest in real estate

When trying to beat inflation to achieve your saving goals, a good strategy is to invest in real estate. Inflation often affects the purchasing power of cash. Therefore owning a property is an excellent idea to manage inflation. You might be trying to save on a budget, and you are probably wondering how to go about investing in real estate.

Real estate is a very profitable enterprise known to generate a lot of profits for investors. However, another way to invest in real estate is to own your own place. Rent consumes a lot of our funds, and with incessant inflation, it means you would continuously have to spend more money on rent each year. In comparison, owning your home is a better alternative as you won't have to worry about inflation anymore. Also, the house would increase in value over time, meaning you can profit off it if you choose to sell it off.

You should work towards owning your own place; if you don't have enough funds for it at the moment, you could consider paying for it in instalments. You may also consider investment into properties to make a profit. However, you must note that real estate is a long-term investment, meaning you would begin to see the profits in years, not months.

3. Consider investing in stocks

It is not uncommon to find several persons who have a considerable reservation about stocks and equities, yet owning them is an equally effective strategy to push past inflation. Stocks offer a passive income that would help balance the effects of inflation. Over the months, or years depending on the stocks you decide to go for, you can make more profits that would help increase your funds. The reduction in the value of the money won't stop you from attaining your goals. However, stocks may also fall at risk of losses. 

Therefore, an intelligent move is to consider low-risk stocks, but then the interest gained would be lesser. You may also consider brokerage accounts to help you manage your funds. It is, however, essential to note that the amount of money invested in this brokerage account would affect the amount of money you can earn. Therefore investing more means more profit. You should also consider diversifying your investments to make more profit and reduce risks.

4. Invest in cryptocurrencies

An investment in cryptocurrencies is one of the most intelligent choices you can make at the moment. One of the causes attributed to inflation is the printing of fiat currencies like dollars, shillings, and pounds, which ultimately leads to a decrease in the value of money. This challenge is totally eradicated with cryptocurrencies. For instance, an earning of $1000 might only be worth about $800 because of inflation.

Therefore, with the same earning in about a year you would not be able to afford the things you were able to. However, cryptocurrencies like bitcoin have proven to be a hedge to inflation. Bitcoin, for instance, has a fixed limit of 21 million coins. The fixed supply of bitcoin makes it resistant to inflation, making it the best hedge to inflation. This means that you would not have to worry about the value of your money decreasing because the nature of bitcoin makes it resistant to inflation. Therefore, saving in cryptocurrencies is one of the best decisions you can take to safeguard your savings against inflation.

Apart from this, cryptocurrencies are very profitable as past years have marked a notable increase in the value and price of these cryptocurrencies. Therefore, an intelligent move might be to consider cryptocurrencies as an alternative to saving in traditional banking accounts. This would not only protect your earnings from inflation but holding your funds in cryptocurrencies means that you would earn a passive income from simply saving. There are also cryptocurrency saving accounts you may consider to meet your saving goals.

Although the volatility of cryptocurrencies is a source of concern for many, cryptocurrencies like stablecoins are, however, pegged to commodities and relatively stable assets such as gold to minimise volatility. In this case, several people convert their fiat currencies into Tether and store them to beat inflation. Therefore, regardless of the volatility concerns about cryptocurrencies, they are one of the best options to save your funds. In comparison to other saving options, cryptocurrencies offer a better alternative as other saving strategies still store in fiat currencies which are still prone to inflation. Therefore, a good thumb rule might be to combine saving in cryptocurrencies with other saving strategies.  

You may also invest in cryptocurrency projects like Mining, Decentralised Finance (DeFi), liquidity pools, lending, yield farming among many others which have proven to be very profitable to investors. However, to prevent your funds from being idle and subject to inflation, you should consider cryptocurrency which is deflationary in nature.

5. Reconstruct the idea of Emergency Funds

Holding funds idle in your savings account might not be the best option for you considering that inflation is imminent and the value of money is decreasing. Yet, it is understandable that you would like to hold some funds handy to meet your daily expenses as well as emergencies. This is why it may be advisable to reconstruct the idea of emergency funds. 

In this regard, you should consider splitting your savings from your emergency funds.  In this case, you keep some funds handy while you diversify the remaining funds in various profitable schemes. This would help you to earn more while ensuring that you have enough to meet your urgent needs. Through this means, you earn a passive income that can be used to push past inflation. 

You can consider diversifying investments in gold, mining pools, staking among several other investment portfolios. However, some financial analysts suggest that you hold even your emergency funds in cryptocurrency. Using wallets with fast withdrawal features like mobile money available on Yellow Card, you can easily complete withdrawals and deposits in seconds making your emergency funds handy. The best part is that you also have the opportunity to earn more from your emergency fund. 

However, it is essential to note that inflation reduces the purchasing power of your emergency funds. Therefore, over time you should increase your emergency funds. This is to ensure that your emergency funds can still cover your expenses when the need arises. Yet, you may not need to worry about this if your emergency funds are stored in cryptocurrencies as the value would increase over time.

It is almost impossible to avoid inflation, yet, you can reduce the effects inflation has on your earnings. Adopting these strategies would help you not only maintain your net worth but also save more.

Another strategy you can adopt is maintaining a budget. Sticking to a budget might seem more appropriate when your funds are quite limited; however, it would ultimately help you save better. A budget would ensure that you can meet your expenses and set aside enough to increase your savings. You should also avoid taking on debts on your credit cards or bank loans as they may impede you from attaining your long-term financial goals.

Investments would help to increase your savings and ultimately reduce the effect of inflation. However, the best investment you can make is in yourself. By investing in yourself, you increase your earning power. Investment in yourself begins with quality education and harnessing skills that would match your financial goals. By investing and maintaining the right saving strategies, you can attain your financial goals irrespective of inflation.