We have all heard about market
fluctuations and inflation. Little bounces or dips in prices or market
fluctuation impacts an individual’s account and investments. Inflation and
interest rates of a saving account are often
linked. This cycle is dangerous. When
inflations are on a rise, savings account offer flexibility to its users and
allows to withdraw money frequently with limited penalties. The deposits on the
other hand offer higher interest rates but limit access to your funds until the
maturity of the term.
No country can ever do away with the
silent thief called inflation that eats into the value of your investments. But
money-wise people can do wonders and sail through a tough time with some awareness
and planning.
Who controls inflation, why?
Central banks hike or slash short-term
interest rates to stabilise and liquidate economy. And there are several reasons
why market fluctuations take place. When financial policymakers wish to
increase the money supply in the country, they decrease the interest rate and
people tend to spend money or borrow it.
Factors impacting interest rates
Market fluctuations can chip off the
investment returns and could be harmful to fixed income returns like bonds. As
these payments are fixed, a rise in inflation leads to a decline in purchasing
power, rising interest rates on your saving account,
deposits, etc, and loan payments become more affordable.
Market fluctuations make depreciates
money. When inflation is on the rise, things become more expensive. But there
is no point in eroding all your savings and the answer to this is to invest in equity
income funds and of course stash a good amount for an emergency.
Still, not all is doomed when there is
a rise in inflation. Inflation raises short-term interest rates to reduce the
demand for credit and help prevent the economy from overheating. And when interest
rates rise, savings account rates automatically soar.
The way out
Surf options: Most often it is a good idea to wait and watch. Look for
equity income funds which pay income in the form of dividends. Government bonds
are safe and their interest payments are adjusted for inflation.
Stay away from fixed incomes: Investing in fixed income like bonds
could produce a stable income – hence if inflation raises the purchasing power
declines. Similarly, investing in the stock market carries a high risk of
losses.
Shop around: Most banks offer high-interest rates. Hence, look for such
banks to open a saving account.
Long-term saving: Ensure you have the right account to
store your savings. Invest in long term periods even if you may lose a bit on
your purchasing power.
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