Your Savings and Inflation
Throughout the game, we hope you have been hitting your monthly savings target and have built up a healthy Emergency Fund.
Just like a real savings account, your savings account in this game has been earning interest every month too – you might notice a few extra dollars or cents added at the end of each month. Most of you are earning 3% interest on your savings account, and this can add up to a decent chunk of change after a year.
However, earning a low rate of interest on your savings does not necessarily mean you will be able to buy more things in the future. This is because of inflation – the tendency of prices to increase over time. A dollar today can probably buy a lot more things than a dollar 10 years from now. So the rate of inflation is a major factor to consider when you set aside money in your savings account.
Here’s how it works – if you put $100 in your savings account today with a 3% interest rate, 1 year from now you’ll have $103 saved up. However, all the stuff you could buy today for $100 might cost $105 next year – this would be a 5% Inflation Rate. So even though you have more money to spend, your “Buying Power” actually went down!
Here’s how much inflation we saw from the year 2000 through 2020:
This “compounds” each year so an item that sold for $100 in the year 2010 would cost about $120 in 2020!
This means if the interest rate you earn on your savings account is less than the rate of inflation, you are actually losing your ability to buy things each year. This is why most financial experts recommend that after you have your Emergency Fund set aside in a savings account, you start investing in other things that typically earn a higher percentage that the inflation rate. For example, investing in bonds has historically returned 5% and investing in stocks has returned about 8%.
For the purposes of this budgeting game, we do not add any inflation over time. This means the interest you earn in your savings account is just pure profit for you – so save up as much as you can and hit your savings goals every month!
Budget Game Tip