Open a Savings Account Online | A Simple Way to Keep Up with Inflation
Simple Economics – Inflation Rate vs. Interest Rate
The header to this paragraph may seem intimidating but once you see the concept explained it will be ridiculously simple. Trust me, you will not need a bachelor’s degree in Economics to figure this out. Ready? If the inflation rate is higher than your savings interest rate your savings account cash loses buying power every day. If your interest rate is higher than the inflation rate, your savings account cash gains buying power every day.
What’s the lesson? Make sure as much of your savings account money is earning more than the rate of inflation as humanly possible. How do you do that? Open a savings account online.
Why Open a Savings Account Online? Why Do Online Banks Pay Higher Interest Rates?
I would hope the answer to the first question should be now obvious. An online savings account will pay higher interest rates, hopefully at or above the inflation rate at any given time. This will help your emergency cash tread water as time passes.
The answer to the second question is less obvious, but can be discussed without getting too heavily buried by economics and finance jargon. The simple answer is that online banks specialize in understanding and managing deposit accounts like yours and mine. The long answer… well, that’s filled with economics and financial jargon like economies of scale, low overhead, and stuff like that – probably stuff that isn’t going to enhance your understanding of banking – and this article is more concerned with your savings and not bank earnings anyway.
Why Does Buying Power Matter When It Comes to Opening a Savings Account Online
Buying power is EVERYTHING in economics. If you are saving for a rainy day, lets say… maybe you are concerned about winter oil prices. Let’s say you put aside $500 for an emergency 200 gallon oil purchase in case this winter is colder than prior years. What happens when oil prices jump 10%? Naturally the cost of 200 gallons of oil is going to cost 10% more, or $550 total. If you had your $500 emergency cash stuffed in a mattress, you’d have to come up with another $50 to cover the increased price of heating oil. Not good when the budget is tight, right?
What if you open a savings account online and put the money in an account that earns 2% annually? In this case by the end of the year when the extra oil bill comes due you’d have $510 in your online savings account, meaning you’d only have to come up with $40 elsewhere.
Oil Isn’t the Best Example of the Insidious Creep of Inflation
Now admittedly that wasn’t the best example because oil prices swing wildly and savings rates generally don’t but the point is the same: prices generally increase at a rate we call inflation. Historically inflation runs between 1%-5% depending on the economy at any given time, and generally is between 2%-3%. Let’s try a different but implausible scenario for simplicities sake.
A Grocery Cart Example
If our example had been about groceries instead and we talked about our weekly grocery bill increasing 2% to $102/year from $100/year instead and we’d had a savings account with $100 in it at the beginning of the year we would see that a savings account earning 2% would have $102 in it at year end, fully covering the increase in prices from inflation. Had we stuffed the $100 in a mattress (or left it in a local savings account) we would be short $2 at the check out line. We’d either have to borrow the $2 from someone, or do without something in our basket. Does that mean we do without a bar of soap? A candy treat? A pair of nylons? That will vary based on your choice. Having to make this borrowing or “doing without” choice is what economists call “reduced standard of living due to inflation.” When prices increase but incomes do not, people can not afford to buy today what they bought yesterday (or last year). Doing without items previously bought and used in the past is the very definition of a reduced standard of living.
Bringing It All Together – Why Opening A Savings Account Online Matters
As a consumer with real life problems and real day to day cash flows you are going to have idle cash somewhere… either in a checking or savings account or elsewhere. What you need to realize is that ANY cash not earning interest is losing it’s ability to buy goods every day in a tiny drip we call inflation. In order to reduce inflation’s impact on your family’s standard of living, put as much of your emergency cash to work earning as high a savings interest rate as possible: open a savings account online to help reduce the slow bleeding drip impact of inflation on your family.
