During times of high inflation, it can be tempting to look for ways to grow your money at rates higher than the rate of inflation. Investing, and potentially earning higher returns, can feel more appealing than the average savings account. But a savings account is still worth keeping, even during tough times. If you’re making ends meet, and still have extra to put aside, remember these four reasons to keep saving in mind.
1. The value of building an emergency fund
Your emergency fund is one of the most important short-term savings goals to keep up with. It’s hard to predict when you might need it, but when you do need it, you’ll definitely be glad you saved up.
When inflation rises it can strain your budget when everyday items cost more than they did. That may mean you have less to save than before. Still, it’s better to try to save a little than none at all. Start with building a cushion that would cover at least one month of your expenses. If you can, try to increase your savings to three months of your expenses. If you need to draw on your emergency fund in tough times, you can re-build it again.
Learn more about why, how and where to keep an emergency fund.
2. Savings accounts keep your money accessible when you need it
Savings accounts are ideal for short-term financial goals. You might want to save for a couple years for a dream vacation or a home renovation.
Money held in savings is easily withdrawn or transferred on the day you want to make your purchase. By contrast, money held in investment accounts can often take longer to be changed into cash.
3. Savings can be lower risk than many investments
While you may be tempted to prioritize investments with potentially higher yields, during times of inflation, don’t overlook the value of a savings account. During times of market volatility, savings accounts can perform better than investing accounts.
Having a savings account can also bring you peace of mind knowing it is less vulnerable to market volatility.
Inflation shocks can have many economic ripple effects, which means that your investments can change in value. Sometimes, market fluctuations can cause significant changes from one day to the next. By comparison, the balance in your savings account won’t go down unless you withdraw money.
If you know you want to keep your money set aside for a short period of time such as a year or two, consider the different options for short-term savings.
4. A savings habit can help you over the long term
There’s an old adage that says the best time to start saving was several years ago — but the second-best time is now.
If you’re able to start a savings habit during tough times, chances are you’ll continue it into the future. Your new habit can contribute to setting you on the path to greater financial stability.
Need help finding money to save? Try our spending habits calculator to add up how much you could save by eliminating some of your recurring expenses. Or, see these tips on ways to make it easier to save.
There are various reasons to save or invest or both. Find out more about saving versus investing.
Summary
When inflation is high it can be tempting to cut back on saving. Here are four good reasons to keep saving:
- Building an emergency fund will help you during tough times.
- Your savings will be accessible when you need the money quickly.
- You’ll have peace of mind knowing your savings balance won’t go up or down with market fluctuations.
- A savings habit will help you over the long term.
