You might not know or realize this, but your savings account is losing you money (this same concept applies to CDs as well). It might not be apparent and it might be slow due to the interest you earn, but the value of your savings is losing money. This loss in value is due to inflation, or the rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. This means that for every dollar you have, it will buy less goods and services next year compared to this year.

If you are one of the lucky few who makes a little less than 1% APY (most likely you make somewhere between 0.35% and 0.05% APY) on their savings account, and we assume that you have $10,000.00 in that savings account, after one year you will make $100.00 in interest. Assuming that inflation is 3% after that one year as well, the net value of your investment would be a loss of $200.00. Where you started the year with a savings account value of $10,000.00, you ended the year with a savings account value of $9800.00 [1]. Doing this math over a corse of a few years, you can see how your savings could lose value.

What can you do to make sure that your savings does not lose in value? Minimize the amount of liquid and non-liquid assets that you have that do not grow in value of more than 3% a year. How do you do this? With investments. You can invest in things like I Savings Bonds, which increase in value at a set amount of interest plus the amount of inflation, or investments in ETFs that follow commodities such as gold, oil, sugar, soy oil, aluminum, and copper. Commodities are excellent protection against inflation.

Before making any financial decisions talk to a professional financial adviser about your specific financial situation.

[1] If you are interested here is the same math using actual numbers. Starting 2011 with a savings account value of $10,000.00 and with a 1% APY, you would start 2012 with $10,100.50. The average inflation rate between 2011 and 2012 was 2.18% making the actual value of your savings account starting 2012 to be about $9884.92 (based on Consumer Price Index).