A little over a year ago, the penny dropped on the concept of “inflation.” For several years now, I’d been able to save a little money each month and the number in my savings account was slowly rising a few pennies a month. I’d had my money in my regular bank’s savings account and had considered that the “right” thing to do.
Then, I was walking in a park with J, and for reasons which are lost to time, he wound up explaining the following:
A cup of coffee that today costs one of my dollars will next year cost a dollar two. But I will still only have the same thing called one dollar. Meaning that conceptually, even if I save that dollar, I’ll only have 98cents where this year I have a whole dollar.
What this idea sent me into was a panic.
Because for more than five years, I’d diligently been siphoning off money every month into my savings account — but now realized that there was a hole in the bottom of that bucket called “inflation.”
No matter the fact that it was in a savings account (and yes, technically I was “saving”), that money was also leaking out a sieve with every moment it sat in a near-no-yield account.
I was appalled. I literally dropped his hand, stopped walking in the middle of the path, and was aghast. WHAT?! Wait, what?! Explain this again.
And he did. And I didn’t move. He eventually nudged me on as I felt the foundation of savings I’d been building crumple to sand beneath me.
If the price of everything goes up about 2% a year, but my dollar in the bank is not growing at that same rate, I am losing money. (sort of)
Nearly immediately, I researched savings accounts that could rival the rate of inflation and found Synchrony Bank and Marcus Savings, each of which now have savings rates of over 2%. The 2018 rate of inflation (CPI, in this case) was 1.9%, meaning by putting my money in those savings accounts, they ARE actually earning money, which is what I had thought my savings account was doing in the first place!
I had imagined that by putting my money in a savings account, that each month those little additions of a dollar here and a dollar there were EARNINGS. It turns out that, because they weren’t keeping up with the rate of inflation, they were not only NOT earnings, they were indicating a LOSS.
For years, I had felt self-esteem about saving every month. Which is great, and well and good, and I continue to think that it is important.
However, with the penny, nickel, DOLLAR drop that I had last year, I realized that all of that hard earned money was actually a drain.
So, I suppose this is a cautionary tale about ignorance of the financial system — because understand it or not, like it or not, want to be in the “system” or not, I am a part of it. And, I DO want to be in the system, because that can be where benefits are. If there are options for me to increase (or at least HOLD) my teeny weeny wealth while I SLEEP, then I should do everything I can do to that.
And while I also later made other choices that increase that yield, starting with moving my savings to a sturdier bucket was a start.