Inflation is a slow killer. If you’re like me and feel the need to “do something about it”, this article is for you! Today I’m trying to explain why saving money makes sense, even though inflation is slowly drowning us all.
Saving money during inflation is smart because after the inflation there will likely be a recession, in which cash is king. In addition, inflation devalues your safety net, so you should keep saving every year to maintain it.
I know it’s hard to save money, especially if the bills increase due to inflation. If you’re struggling, read this article about saving despite paying expensive bills.
Let’s get into the meat of it, and get deeper into the two best reasons I can think of for saving money during inflation:
Suggested reading: Why You Should Invest During Inflation
Save Money For What Comes AFTER Inflation
The current inflation we’re seeing is largely due to the central banks printing excessive amounts of money combined with a mind-blowingly low interest rate.
This crazy printing and low rates have stimulated the general economy, pushing up investment vehicles like stocks, crypto and real estate, and other stores of value like art and old whiskey.
However, the party is ending. At this point, yearly inflation is hitting record highs of over 9%, which is way higher than the target inflation of roughly 2%. (source)
Worldwide, banks are tightening the money-printing and raising interest rates. The music is about to stop.
This will without a doubt send us into a recession.
A recession is the only way to decrease demand enough to stop inflation from turning into “hyperinflation”.
Recessions are long periods of time where stocks, crypto, real estate etc. decrease in value relative to the U.S. Dollar. Basically, assets fall in price because tons of people try to sell them to get cash.
And know this about recessions: Cash is king!
Having some cold hard cash sitting on the sidelines can be the difference between being screwd by the recession, or planting the seeds that will bring you success in the future.
I guess what I’m trying to say is this:
Save money through inflation because after the inflation there will likely be a recession, in which cash is king.
Suggested reading: Is Saving $500 Per Month Good? (Where You’ll Be In The Future)
Inflation Melts Your Current Savings; You Need More!
We should all have a safety net of at least six months worth of living expenses. This is priority numero uno for me.
The bad part about saving up “six months of expenses”, is that the monthly expenses rise because of inflation.
The solution is therefore to continually save a small amount after you’ve hit your “safety net goal” to fight off inflation.
To be more precise, here’s a concrete suggestion:
After saving up six months of living expenses, keep saving 10% of the value of your safety net every following year. This makes up for inflation, and then some.
Let me give you an example:
Bob and his wife Linda need $2,000 a month to get by. Therefore, a six month safety net would total $2,000 * 6 = $12,000.
The yearly amount they need to add to this safety net to fight inflation is 10% of that:
Bob and Linda needs to save $12,000 * 0.1 = $1,200 after one year to fight inflation.
After two years, they should put away $13,200 * 0.1 = $1,320 (10% of the initial $12K and 10% of the 10% from last year).
Here’s a table of the yearly savings Bob and Linda would have to keep up:
| Year | Savings Required to Fight Inflation (Initially $12,000) | Safety Net After Additional Saving |
|---|---|---|
| 1 | $1,200 | $13,200 |
| 2 | $1,320 | $14,520 |
| 3 | $1,452 | $15,972 |
| 4 | $1,597 | $17,569 |
| 5 | $1,757 | $19,326 |
| 6 | $1,933 | $21,259 |
| 7 | $2,126 | $23,385 |
After seven years, the safety net has grown from $12,000 to roughly $24,000. That’s good, and fights off the devaluation brought on by inflation.
To summarize, this is what I’m trying to say:
Saving money through inflation ensures your safety net keeps up with the rising prices. Make sure you add an additional 10% of the safety net every year in order to fight the devaluation of your cushions.
Now, saving all that 10% in one go is hard. You should figure out how much your yearly goal of 10% makes in your preferred savings frequency. You can read more about how often you should save in this article.
“What should I do with the leftover money after saving?”
There are two viable options: Saving even more, or investing it. If you need an answer to this question, you can read this article about saving vs investing during inflation.
Suggested reading: Is Saving $2000 Per Month Good?
Closing Thoughts
Inflation is the consequence of reckless central bank stimuli. It’s arrogant, to say the least, to think that one can control the economy through interest rate changes and cash injections.
First of all, it doesn’t work in the long run, bringing more harm than good. Second, it inevitably corrupts, as the incentives eventually twist the people in control. Lastly, this way of controlling the economy makes the rich even richer.
And who pays for this reckless arrogance? Me and you.
The inflation and the recessions, the endless pressure to outpace the devaluation of the fiat currency we’re forced to use, I’m getting sick of it.
How about creating a monetary system where normal people aren’t forced to moonlight as professional investors?
How about having a monetary system that doesn’t punish the people who save what they have left over, instead of slowly stealing it through inflation?
Enough ranting and complaining. Let’s get back to business:
As long as the inflation rate is below 10% per year, I still think it makes sense to save money.
One should still put some money into investments, but make sure you keep filling up that safety net, and also have some cold hard cash sitting on the sidelines!
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