Understanding and protecting your purchasing power
Imagine walking into your local grocery store with a $20 bill. Last year, which might have bought you a gallon of milk, a dozen eggs, and a loaf of bread with change to spare. Today, those same items could cost noticeably different amounts and $20 may not cover as much. This everyday experience demonstrates the concept of purchasing power—how much your money can buy. Understanding this concept helps you make smarter financial decisions and grow the value of your funds over time.
What Shapes Your Money’s Value?
Your purchasing power changes as the economy changes, influenced by various economic factors. Inflation and purchasing power are inversely related—when prices rise, the amount of goods and services you can purchase with the same amount of money decreases. And, conversely, when prices decrease, you can buy more.
Think about buying a car. The same $30,000 that bought a well-equipped sedan five years ago might only buy a basic model today. Or consider housing—monthly rent that was $1,500 a few years ago might now be $2,000 for the same apartment.
Understanding purchasing power isn’t about watching prices go up and down, however. It’s about learning how economic changes affect both your spending and saving strategies. This helps you make smarter decisions to protect your money’s value in the years to come.
Making Your Savings Work for You
One way to counter inflation and preserve purchasing power is through smart savings choices. Traditional savings accounts offer accessibility, but interest rates can vary widely. High-yield savings accounts, for example, often provide significantly better returns than standard accounts, while government securities, such as Treasury bills or savings bonds, offer other secure savings options.
For instance:
If you had $10,000 in a regular savings account earning just 0.1% annually, after five years, you’d earn around $50 in interest.
By contrast, in a high-yield savings account earning 4% annually, you’d earn about $2,166 in total interest over the same period.
A financial advisor can help you explore savings options that best fit your goals, making it easier to protect your purchasing power over time.
