Inflation has been in the news a lot lately, and for good reason. In October, consumer prices were up 6.2% from the previous year. And while this recent bout of inflation has been pretty extreme, the reality is that inflation is a perpetual threat to consumers' buying power.
There are certain things you can do if inflation is making it difficult to keep up with your bills right now. First, you can try cutting back on non-essential spending, like leisure and entertainment (not an easy thing, but a potentially necessary one if keeping those expenses means landing in debt). You can also try getting a side hustle to boost your income and keep up with rising living costs.
But there's another important step you can take to protect yourself from long-term inflation -- invest in a brokerage account.
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When you put money into a brokerage account, you can invest that money so it grows into a larger sum over time. If your investments perform well, you might score a high enough return in your brokerage account to outpace inflation. By contrast, if you leave your money in a savings account, you may not get paid enough interest to beat the rate of inflation.
Right now, even the best savings accounts are paying somewhere in the ballpark of 0.50% interest. Granted, rates are exceptionally low right now, but even if they climb to 1% or 2% in the next few years, annual inflation generally sits around 3%. If you're only earning 1% to 2% interest in a savings account each year, you won't outpace inflation on a long-term basis.
Now, let's imagine you invest in stocks through your brokerage account, and your portfolio delivers an average annual 7% or 8% return. That's actually a bit below the stock market's historical average, and it accounts for years when the market does a lot better than its average return, but also, a lot worse. If the general rate of inflation over the next, say, 20 years stays at around 3%, but you earn more than twice that return in your brokerage account, you'll come out ahead financially.
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Of course, investing in a brokerage account isn't without risk. When you buy stocks, there's no guarantee you'll score the returns we just used in our example, or that you won't lose money. But if you load up on a diverse mix of stocks and hold them for many years, there's a good chance you'll come out ahead financially over several decades' time.
Trading one risk for another
Some people don't invest in a brokerage account because they think it's too risky. But it's important to realize that if you don't take that risk, you'll shoulder another one -- losing buying power in the face of inflation. If you've yet to open a brokerage account, you may want to start researching your options and investing your money to give yourself that edge.
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November 28, 2021 at 11:00PM
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How a Brokerage Account Can Protect You From Inflation - Motley Fool
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