How is Inflation Affecting Your Cash Investments?

If you've been watching the financial news lately, you've probably not found it overly comforting. Among the many threats we hear about is inflation. 

On the Today Show recently, for example, a financial newscaster made a brief reference to the government’s plan to buy $600 billion dollars in bonds.  These kinds of actions may seem like something far removed from our daily life, but they actually represent an effort by the government to cause inflation. Sounds crazy, right? Well, it's actually not. A certain amount of inflation is good for our country's economy (read our inflation postto find out why), helping to drive down unemployment and pulling the country out of the current recession. But it can also reek havoc on your cash-based investments. Simply leaving your money in a mattress may not be as safe as it seems.

What Does This News Mean for My Family?

When we think about cash investments we generally think of savings accounts, money market accounts and certificates of deposit. If you've looked into any of these lately, you've probably noticed that they are typically yielding less than 2%. If the government is trying to stimulate the economy by driving inflation to 2%, those kinds of yields don't sound very appealing. If your money is gaining 1.5% year, but is then worth 2% less due to inflation, then you're actually losing ground.

How Do I Protect My Family and Finances?

Since cash securities may not offer a lot – or any – financial growth, the best thing you can do is learn about all the options that are available for making your money work a little harder for you. If cash investments aren't always as safe as they seem, one option is diversifying your investments.  Mixing in investments that react differently to factors like inflation can help protect you from various contingencies.

Invest In Your Family

Another reason to consider investing in stocks or other more aggressive investments is that investing in stocks really means investing in our economy.  If the government is directing policy to help that economy grow, it might make sense to bet on their side.  Ideally, the government will wisely invest money back into our children's future and offer them opportunities to grow as financial investors! Even if the investment isn't wise, they're still injecting money to try to drive the engine of the economy, so betting against them is questionable.

So, where does this all leave us?  If we consider the current inflation plan of the US Government, we can predict that cash securities will offer little return to investors.  To gain the best opportunities for high- and/or medium-returns, we should diversify our investments.  Of course the first step in that process is to learn about other options like stocks and bonds, as well as keeping an eye on government policy and how it might affect your family.

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