Protecting Your Savings: Understanding Purchasing Power Risk

Asher Tame
Asher Tame Finance
4 Min Read

Purchasing power risk refers to the possibility of your savings losing value over time due to inflation . It means that the money you save today may not be able to buy as much in the future . Essentially inflation wears away the buying power of your savings .

The Concept of Purchasing Power: Saving Today vs . Buying Later

When you save money you make a trade-off between spending that money today or saving it for the future . Every dollar you save is a dollar you can’t spend immediately . The concept of purchasing power takes this trade-off further by questioning what that dollar could have bought today and what it will be able to buy in the future .

Inflation and Purchasing Power: The Challenge of Rising Prices

Inflation means the gradual increase in prices over time and it directly impacts purchasing power . As prices rise the value of your money decreases . In order to measure purchasing power economists compare the price of goods and services against indexes like the Consumer Price Index (CPI) . Think of the price difference of a gallon of gasoline from decades ago to today .

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Managing Purchasing Power Risk: Beating Inflation with Smart Investing

Avoiding purchasing power risk by not saving is not a wise financial strategy but you can manage it effectively . The key is to invest in a way that generates returns that outdo inflation . By choosing the right asset allocation and taking a moderate amount of risk you can expect to beat inflation over the long term .

Beating Inflation: The Importance of Long-Term Returns

In order to illustrate consider a scenario where inflation is 3% and your portfolio provides a 6% return . With the 6% return your purchasing power remains unharmed . If you simply let your money sit without investing you would lose purchasing power over time . It’s crucial to note that beating inflation every year is not necessary . The goal is to outperform average inflation over the long term .

The Impact on Investments: Rising Inflation and the Need for Higher Returns

Investors must be aware of the impact of rising inflation on their investments . Inflation decreases the number of goods or services that can be bought with a set amount of money which potentially wears down the value of investments . In order to protect yourself against purchasing power risk you should search for returns that beat the current inflation rate . Some advanced investors also monitor international economies for potential effects on long-term investments .

Final Thoughts

Through understanding purchasing power risk and taking active steps to control it you can protect your financial well-being and ensure that your savings and investments maintain their value over time . By staying informed and making strategic investment decisions you can navigate the challenges that are posed by inflation and secure a stronger financial future .

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Asher Tame
By Asher Tame Editor-in-chief
Hi there! My name is Asher, and I'm a Finance Editor based in Canada. I'm passionate about all things finance and have spent years honing my skills in the industry. I graduated from the Master of Finance program at the University of Toronto, which provided me with a strong foundation in financial theory and practice. Since then, I've worked in a variety of finance-related roles, including as a financial analyst and a financial advisor. These experiences have given me a deep understanding of the industry and a keen eye for detail. As a Finance Editor, I'm responsible for overseeing the financial content produced by my team of writers. I work closely with them to ensure that our articles are accurate, insightful, and relevant to our readers. I'm committed to providing our readers with the information they need to make informed decisions about their finances.
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