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  • Writer's picturethianecarter

The "I" Word That's Taking Your Money

Updated: Jan 9, 2022

I’ve got something to tell you and it may be boring. So here it is - inflation. Yup…we’re going to talk about inflation. And it’s for your own good, because it's taking your money.

First - What IS inflation?

When I learned to drive in 1994 (no commentary, please), gas was $0.99 per gallon. Today, gas is approximately $3.15 per gallon. Now, a dollar is still a dollar. But, what I can actually BUY with one dollar has changed dramatically in 25+ years. Inflation describes the increase in the cost of goods and services…but it’s easier to think of it in terms of what you can buy with a dollar. What happens to that dollar when inflation increases quickly?

Depending on your age, you may remember inflation of the 1970s, when inflation went up to almost 14%. That meant that an item that you could buy for $1.00 in 1975, cost $2.02 in 1985. Since 2020, inflation has gone up by almost 7%. That means that an item that cost you $1 last year, will cost you $1.07 today.


Why am I telling you this?

Because I’m a geek and I think about this stuff all of the time? Yes - that’s true. But in addition to that, inflation is one of those topics that we hear on the news and we think it has no connection to us. It sounds like something economists talk about in their sleep, but the rest of us can’t quite grasp…it’s not. It’s something that affects you, and your money every day. I’ll prove it to you…

Where do you keep most of your money? Is it in the bank? Maybe a savings or checking account? Are you earning any interest in it?

I can answer that right now - you’re not. Based on interest rate levels right now (we’ll talk about that later, too), you’re not earning a dime on the money you’ve put in the bank. So - based on what you now know about inflation, what does that mean for the dollar we just talked about?

For fun, let’s say that you put $100 in your bank account in 2018 to prepare to buy a really cute dress. Let’s say that it’s a regular checking account - it doesn’t earn any interest, but you forgot about it, and never bought the dress and you never spent the money. Today - there is still $100 in that account (yea!!), but you couldn’t buy the dress…it costs $110.38. You didn’t do anything, but the money isn’t worth the same thing. And that’s the “cost” of inflation - it eats away at your money even when you’re not doing anything. So what do you do about it?

I already ranted about the difference between saving and investing. But for today let’s agree that saving is the act of preserving money and investing is the act of making money grow.

There is a place for saving and investing in your finances.

There is a place for saving and investing in your finances.

There is a place for saving and investing in your finances.

Ok - so I think I’ve made it clear - there is a place for saving and investing in your finances. And you should decide how much saving and how much investing is best for you. However, you should be clear that saving money typically does not protect you from inflation. Investing money protects you from inflation.


What can you do about it?

So once, you’ve decided how much of your money should be saved, and how much should be invested - what next? We’ve already established that you won’t earn any money in savings. But when inflation is going up, there is an “intermediate” choice between saving and investing: Series I bonds.

Series I savings bonds (the “I” in Series I bonds stands for “inflation) are a way to profit from rising inflation. Here’s how it works:

  1. Series I bonds have two interest rates, a fixed rate and an inflation rate that changes every 6 months.

  2. Right now, the interest rate that you earn on the bonds (based on inflation) is 7.12%.

  3. This means for 6 months, you are guaranteed to earn 3.56% through April 2022. In 6 months, the inflation rate is recalculated and you may earn another 3.56 (3.56% x 2 = 7.12%). Or the rate may go down and you’ll earn the new rate for 6 months.

Here are the pertinent details:

  • Your money is tied up for a minimum of one year

  • The money can be withdrawn any time after a year, but there is a penalty of 3 months interest if you withdraw before 5 years.

  • The I-bonds stop earning interest after 30 years

  • You can purchase I-bonds for as little as $50

As usual, I'm not providing you with financial advice, I'm providing financial education. You now know something you didn't know before - that doesn't mean it's the right thing for you. But as inflation is rising, it's another option. Most of the time, inflation is “reasonable” and we barely feel it. But it’s a force eroding the value of money and Series I bonds are one way to shield your money from it.

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