Beat the Time Bandit (Inflation)             

Growing up in back-woods America, we frequently heard tales of people hording money under mattresses, hiding it in caves, or burying it in tin cans. Apparently this sort of practice came about as a result of distrust of local banks and financial institutions, and maybe to a lesser extent of the government itself; which in turn, seems to have stemmed from numerous instances of bank closures, market failures and other financial calamities prominent during early 20th century America. When we were taught to "save a little money for a rainy day," it was understood to mean cash money in a cache or stash somewhere close at hand.

While that sentiment was no-doubt well-intended and was probably prudent on some level, we suspect it has left many folks at a disadvantage when it comes to good financial planning. Here's why. Put simply, as a general rule, money loses value over time. This phenomenon is commonly referred to as inflation. To put it another way, time tends to steal the real value of your stashed cash. If this concept seems unfamiliar, consider the following.

Have you heard "old folks" talk about how little it used to cost to buy gasoline, bread or milk when they were young? It usually sounds something like this. "When I was a boy, you could buy a gallon of gas for five cents." Or, "Bread used to cost 25 cents a loaf." Or, "I remember us girls buying a soda pop and candy bar for a dime at the local drug store." Can you purchase those items at those prices today? Probably not. Without complicating the picture, the market forces that have pushed those prices higher and higher over time are collectively known as inflation. The important thing to understand here is that if one of those kids had put a dollar in a piggy bank and then walked into a store yesterday with their dollar in hand asking to buy a gallon of gas, a loaf of bread and some tasty treats, they'd be laughed out of the convenience store.

There is much advice out there about putting spare change into jars and other folks advising no-risk approaches to handling your daily funds. The sad truth is that by following that advice, time is quietly stealing your hard earned cash even if the dollar-value of your cash remains unchanged.

Financial folks tend to use 3% as a handy figure for estimating the rate of inflation over the course of any given year. It will usually be slightly higher or lower than that; but it's a good figure for estimating and we'll use it for the purposes of this article as well. What that means is that if you have $100 sitting in a sock drawer "for a rainy day," one year from now, it will only be worth $97 compared to today's value. Time will have stolen the equivalent of $3 from you, even though you were "playing it safe" with your nest egg. If you left it there for another year, it would only be worth $94.09 compared to its current $100 value. That's because inflation continues to drive up the cost of most day-to-day purchases. The longer that money sits somewhere without growing, the less it will be worth when you go to spend it. Day-in and day-out, every dollar not earning interest is losing $.0000821 per day; day after day. That's $.0005747 per dollar per week and $.0024989 per dollar per month.

Because inflation acts as a time bandit, stealing away your money over time, you need a strategy for fending it off. At a simple level, that means you must find ways to force your cash on hand (and other investments for that matter) to grow at or beyond 3% per year so that it retains its present purchasing power. A piggy bank doesn't do that. Neither does a bank account with low or no interest applied to your balance. Some investments typically considered safe (like bonds) can't even deliver that. Your challenge is to find options that do offer you the best interest level you can get for all of your finances. Since you need easy access to your cash balance for day-to-day expenditures, that money is probably going to be left in a bank account; savings, or more likely checking. So shop around for a bank that will offer an APR (Annual Percentage Rate) of 3% or higher on your account balance. Watch out for any fees or penalties that could reduce your return!

Once you've found an account where you can keep your money while earning 3% or more per year, you'll want to keep as much of your day-to-day money in that account for as much time as you can. Got coins in a jar on the counter? Take them to the bank and get them deposited NOW! Did you get $10 from Aunt Mabel for your birthday? Take it to the bank and deposit it NOW! Getting a check from the IRS? You got it; get the money into that interest-bearing account NOW! Until you do, the time bandit is silently stealing your hard-earned money, 24-7, 365.

Bottom Line:

← Previous                                                                                                                Next →

Top | About Us | Terms of Use
©2007-2010