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On a large scale, the biggest issue is the lack of available options for savers.
With interest rates as low as they are, and inflation as high as it is… saving isn’t exactly encouraged…and that’s PART of the initial problem. Analysts say that, because there aren’t many places to safety stash your savings…investors are engaging in riskier behavior to get a higher return, thereby driving UP asset prices, and further widening the gap between savers..and investors.
The biggest risk isn’t so much young people who keep cash for a few months at a time…but, instead, it’s those who want to save up for a much larger purchase that’s a few years away…and, in the mean time…not only is their money losing purchasing power, but the price of everything else is also RISING…making it even MORE difficult to pay for those things in the future.
Now, in terms of where things could go over the next few years…a new consumer expectation survey found that Americans believe inflation is going to be worse than expected, at 4.8% year over year. Over 3 years…the expectation is an average of 3.7%…which means, if your money makes you LESS than that…you’re losing value.
On the flip side, though…The Fed has made it clear that they believe the inflation we’re seeing is just temporary, driven by year-over-year measurements from the bottom of the market which makes it look worse than it actually is, excess demand fueled by a re-opening economy, and supply chain issues that will take some time to begin running properly.
Even though the general population believes inflation is going to be worse than anticipated…INVESTORS are betting that inflation IS NOT going to last, and that – throughout the next 10 years…it will decline to an average of 2.8%…but, that still raises the concern that your money needs to make AT LEAST THAT AMOUNT just to break even, without losing value…
Now, in terms of what you can do about this, it’s rather simple: The ONLY CASH you should be keeping is enough for a 3-6 month emergency fund held in a high interest savings account – enough to pay your day to day expenses in a checking account – and the REST should be immediately invested, unless you’re saving up for something in particular.
If you’re saving for something that you can buy in the next 6 months – carry on as normal and don’t worry about inflation. If you’re saving up for something that’s 1-3 years away…consider investing some of that in a broad index fund to balance out your risk, and increase the likelihood that you won’t lose TOO MUCH in the event inflation is higher than expected, or the market goes down. THEN…if you’re saving for something 3-5 years away…just invest your money in a broad index fund or a few carefully selected stocks…and let your investment do the heavy lifting for you…. It’s as easy as that.
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