ASavings Account is one of the most essential financial products as it offers liquidity, security, minimal risk and predictable returns (in form of interest). However, inflation can take a toll on your Savings Account.
Inflation reduces the purchasing power of your money and the value of your savings. As inflation rates do not remain fixed, understanding their impact on your bank accounts, both regular Savings Account and Zero-Balance Savings Account is important to protect your financial stability.
So, let us learn how inflation affects the money in Savings Accounts and some strategies that can help you tackle this issue.
The impact of inflation on your Savings Account
Inflation refers to an increase in the general price level of goods and services in an economy.
As prices rise, the real value of money decreases, which has far-reaching effects on purchasing power, investment patterns and, ultimately, overall financial well-being.
Decreased savings
Owing to inflation, the value of money declines which makes it difficult to maintain the same standard of living within the old budget. This leads to reduced savings, forcing you to make less and inconsistent contributions to your Savings Account.
Reduced interest earnings
As you deposit less, your earning potential through the Savings Account interest rate reduces. Even if your savings account accrues interest, inflation can erode purchasing power, which will, in turn, provide you with less financial growth over time.
This results in reduced emergency and retirement funds and leaves you exposed to financial shocks and uncertainty.
Slow progress toward financial objectives
As mentioned earlier, inflation impacts the value of money in your Savings Account by lowering your interest earnings.
If the inflation is too high, it can significantly impact your Savings Account interest rate, which not only affects the returns but also reduces the value of money in your account, hindering your progress toward your financial goals.
An example of how inflation affects a Savings Account
Suppose you have ₹50,000 in your Savings Accounts with an interest rate of 5% per annum amidst an annual inflation rate of 6%. In such a case, the cost of goods and services rises faster than your interest earnings. This means your money loses value and reduces your purchasing power by ₹500 (difference between inflation and interest rate on your deposit).
Hence, despite the interest gained, you effectively lose money and reduce your savings in the true sense.
Smart ways to protect your Savings Bank Account from inflation
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High-yield Savings Account:
To ensure long-term financial stability, choose Savings Accounts that offer competitive interest rates, preferably equal to or higher than the inflation rate.
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Inflation-adjusted interest:
Open a Savings Account only after checking its real interest rate to ensure that you are going to earn better returns even with fluctuating inflation.
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Regular contributions:
Making deposits in your Savings Account from time to time can help you maximise your interest-earning potential and beat inflation in the long term.
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Reduced withdrawals:
The best way to reduce the impact of inflation on your Savings Account is to avoid frequent withdrawals and let the compounding work its magic. By doing so, you will be able to earn a higher interest on your savings.
Coming to an End
Inflation can quietly erode the value of money in your Savings Account and impede your financial progress, resulting in reduced interest earnings and delayed achievement of long-term goals.
To mitigate the effect of inflation on your Savings Account, it is suggested that you carefully compare the available bank account options, consider the one that offers high Savings Account interest rates and adopt consistent saving habits.
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