Inflation is the average rate of increase in the cost of living. Every year the money that we use to buy things loses value, usually at a steady pace. This happens because the prices of homes, products and services increase every year.
The rate of inflation is usually about 2% per year. This means that if you were to put $1000 into the bank today, a year from now it would be worth about $20 less. It is still $1000 but the amount of stuff that you can buy with it has decreased by $20, so even though you didn’t spend it…that’ money is still gone! Sucks doesn’t it? It’s like someone is slowly stealing your money a few pennies at a time…in a way, they are.
If you’re living in Canada you can find out what the current rate of inflation is by going to Canadian Economy Online. If you’re living in the US, you can get this info from Inflationdata.com. These sites will give you the inflation rate, along with other useful info about the current state of your economy.
Inflation is part of the reason that interest rates fluctuate as they do. It is possible for the rate of inflation to become out of hand. That is why the Bank of Canada (The Federal Open Market Committee in the US) raises and lowers the interest rates throughout the year, they are trying to control consumer spending. If the rates are lower, then people will buy more and prices will go up. If the rates are high then people will have less money to spend and will hold back.
This is why keeping your savings in a normal bank account is not recommended. Usually banks pay you less interest than the rate of inflation. This means that your money is actually losing value every year. You wont be able to buy as much with it 10 years from now as you could today. Because of this, I recommend keeping your savings in a high-interest savings account that pays you at least 1% over the rate of inflation.
While your money is in a regular bank account, do you think the bank is earning interest off of it? Damn right they are, they are lending your money out to other people and businesses and charging them anywhere from 7% to 18.5% for it! So make sure that you are getting something in return!
PC Financial is a really good bank to stash your money away. They don’t charge any service fees and they have a high-interest savings account that gives a 4% interest rate as long as your balance is over $1000. This is the highest rate that I have been able to find from a normal savings account, some GICs don’t even offer this much! I have had my money with them for years and signed up for their high-interest savings account as soon as I heard about it. This is where i keep my emergency money and the money that I’m saving up for the taxes that I will have to pay at the end of the year. If I’m going to have to give it to the govnerment, I may as well earn some interest off of it in the mean time!
If anyone knows of other banks that offer really great interest rates, either in Canada or around the world, let us know about it and we will post it here.