Think saving and investing are two different things? Think again.

Whether you're setting aside money for a short-term goal (kitchen renovation), or a long-term goal (worry-free retirement), leaving your funds sitting in an account and not earning anything isn't doing you any favours. This may seem like a practical plan – you put money away, continue to do so regularly, and over time you'll have amassed a desired amount. But the reality is your future money won't be worth what it is today due to the unavoidable effect of inflation.

A person's hands holding a wallet and pulling out twenty dollar bills symbolizing purchasing.

The impact on purchasing

The higher inflation goes, the lower your future purchasing power becomes. Let's suppose the annual inflation rate is 2% and it remains at that level. Today, your dream kitchen costs $10,000, so you make a plan to save that amount in five years. Bad news. In five years, that $10,000 kitchen will cost $11,041 - leaving you short over $1,000.

On the other hand, suppose you took $200/month and put it into a savings account where it would earn an average interest rate (let's say 1%). You would have $12,309 after five years thanks to the effect of compound interest (interest earned on interest year over year). Now you've got enough for that dream kitchen and then some!

An elderly woman holding her husband's hand, leading him toward a sunrise symbolizing retirement.

The impact on retirement

Apply the same scenario of 2% inflation to today's $100,000 salary or annual retirement income. It would be worth only $67,297 in 20 years. To look at it another way, in 20 years you would need $148,595 to buy what $100,000 buys today. There can be severe impacts on the standard of living you're hoping to achieve with your long-term financial goals if your savings fail to keep up with inflation.

Inflation planning should be considered with every financial decision, but is especially important for retirement. It's more than likely that the rate of inflation will to continue to rise. Don't worry though, it's possible to come out ahead!

A person's feet wearing running shoes while walking up a flight of stairs.

Stay a step ahead

The good news is that having a plan for your money will help you stay ahead of the game. Putting your money into investments with the potential to keep up with, or even outpace inflation, is key. Here are a few suggestions:

  • Consider investing in Guaranteed Investment Certificates (GICs) for short-term (1-5 years) savings goals. GICs offer growth, security and a wide range of interest rates and terms to suit your needs.
  • Explore a Tax Free Savings Account (TFSA) that lets you earn interest and take out your money any time without tax penalties. Even better – open a Tax-Free Growth Account with Servus and your deposits are 100% guaranteed by the Credit Union Deposit Guarantee Corporation.
  • Hold growth investments such as mutual funds*. This is one of the most effective strategies because stock market returns typically beat the inflation rate over the long term.

To find out which options are uniquely suited to you, contact a Servus Financial Advisor.

*Mutual funds are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. This article is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds.