For many of us, our first experience with money and banking was a piggy bank. It might not have been a pink ceramic pig with a coin slot in the back and a plastic plug in the bottom, but it was similar in practice. You were told to collect your spare change, put it away, and wait until you had enough money to purchase that toy you wanted.
As adults, we tend to apply that childhood concept to our finances. We put money aside in a regular savings account and assume we’ll reach a magical number ten, twenty, even thirty years into the future. The trouble with these types of savings plans is that they are suited for short-term needs, not long-term ones, and they are especially not suited for retirement planning.
How to Save Money and Increase Your Purchasing Power
You’ve probably heard the popular idiom, “don’t put all your eggs in one basket.” This piece of wisdom is incredibly relevant to your money and wealth management. Putting money into a savings account and leaving it there to grow won’t help you achieve your long-term financial goals. Why not? The answer is simple: low interest rates and inflation.
The Thing About Inflation
Inflation is the reason why twenty dollars in 1980 could buy you a lot more goods than twenty dollars can in 2021. Inflation is the declining rate of purchasing power that a currency has. A general savings account will not offer an interest rate that keeps up with the rate of inflation. Some of the banks in Canada offer a 1.25% interest rate for their savings accounts, while inflation in Canada over the last five years has averaged at 1.68%.
This means that while the money in your savings account is growing by 1.25%, the national currency is inflating at a greater pace of 1.68%. Put differently, no matter how much money you put in your savings account today, in twenty years, it will have less purchasing power due to inflation. In the short term, savings accounts are great, and inflation won’t have too great an impact, but if you want to meet your long-term goals for retirement or other big purchases, it may be time to consider investing your money for a higher return.
Why Investing Is in Your Best Interest
If you want to set money aside and have it out-perform inflation rates, consider talking to a financial advisor about investing. Investments often have interest rates that are higher than the rate of inflation. Investments also produce compound interest, which occurs when you accrue interest on both the original investment and the previously earned interest.
Whether you choose a low or moderate-risk investment is up to you and your individual circumstances. Wealth management consultants can help you assess your needs, review your budget, and develop an investment plan. Plus, your wealth management consultant will be able to show you potential outcomes so you can connect your current activities to future outcomes more easily.
Private Wealth Management in Edmonton, Alberta
Strengthen your financial plan today; request an appointment with Regan Schiller & Associates. Our wealth management team will help you create a forward-thinking and detailed financial strategy that looks past the “piggy bank” method of saving.
Written and published by Regan Schiller & Associates as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from a member of Regan Schiller & Associates.