Money $marts: Savings Sapper: Inflation

What Money Can Buy
Try this quickie research project: Ask your grandmother or other older person what a few things used to cost when she was the age you are now. How much was a chocolate bar? What about a pair of shoes? Or a newspaper? You might be amazed when you compare those costs to today’s prices.

Your saving account is an awesome first step toward being in good financial shape in the future. Keeping up the good work, and stashing some cash whenever you can—and then leaving it there—is super smart and will put you ahead of the game. What could possibly be working against you?

In a word, inflation. Inflation is the increase in what things cost—things like food, rent, or a pair of sneakers. Inflation means you can buy less with the money you have. So, you might have to save more than you thought in order to meet your long-term goals.

How to beat back the inflation factor? Earning interest, and investing, are two of the most important ways. Interest is a percentage of your savings that a bank pays you for keeping your money there. So your money’s actually earning money. But interest alone won’t do it. The real key to getting the upper hand with inflation is investing.

Interest sounds like a great thing, and it is. But interest isn’t always what you get paid. Sometimes it’s what you have to pay!

For example, when you borrow money, you not only have to pay back the principal, or the amount you borrowed, but also the interest you owe for using the money. If you have a loan of $1000 at a 6% rate, at the end of the year you’d owe $60 in interest.

Interest is also how credit card companies make their profit. If you pay off your credit card bill over time instead of as soon as it’s due, you’re paying interest on top of the money you actually spent.

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