Inflation, simply put, refers to the increase in the prices of goods and services, over a period of time. When this happens, you have to spend more money for the same product or service than you paid a few years back. And you have to be prepared to pay even more for the same product or service a few years down the line. This is why setting aside funds for your future needs is of utmost importance.
Given that rising inflation reduces the purchasing power of money, it is also important to understand how inflation impacts the money in your Savings Account. Read on to know more.
How does inflation impact the money in your Savings Account?
Inflation refers to the general increase in prices of goods and services over time. When prices rise, each currency unit buys fewer goods and services than before. This reduction of purchasing power is the primary way inflation impacts the money in your Savings Account.
How inflation works on savings
When you open a Savings Account, you expect your money to grow over time owing to the interest earned. However, if the inflation rate exceeds the interest rate offered by your Savings Account, the real value of your money decreases.
For example, if the bank interest rate on Savings Account is 1%, but the inflation rate is 3%, the real return on your savings is -2%. This means that despite the nominal increase in your account balance, your purchasing power to purchase goods and services has reduced. Hence, inflation reduces savings in the true sense.
Strategies to minimise inflationary impact on Savings Accounts
1. Savings Accounts offering higher interest rate: Opt for a Savings Account that offers a higher interest rate than a regular Savings Account. Although these may still be susceptible to inflation, they provide a better buffer. Do note, that these Savings Accounts may require you to maintain a much higher minimum balance as compared to a regular Savings Account.
2. Diversified investment portfolio: Diversifying your investments can help fight against inflation. Investing in equities, in direct stocks or via equity Mutual Funds can help earn inflation-beating returns over the long term. Do keep a certain portion of your funds in your Savings Account to meet regular expenses and for emergency needs. Simultaneously, invest regularly in equity-linked investments to earn higher returns and build wealth.
3. Regular monitoring and adjustment: Regularly monitor the inflation rate and adjust your savings and investment strategies accordingly. Staying informed about economic trends can help you make proactive decisions to safeguard your savings.
Also Read: Top 5 tips to maximize Savings Account returns
Conclusion
Inflation reduces the value and purchasing power of the money in your Savings Account over time. To protect your savings from inflation, it's important to understand how bank interest rates and inflation interact. Axis Bank provides multiple Savings Account options that provide competitive interest rates and can be opened digitally, from the comfort of your home. Staying proactive and informed about economic conditions will help protect your savings from losing value due to inflation.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
