If you're on a Galaxy Fold, consider unfolding your phone or viewing it in full screen to best optimize your experience.
by Maurie Backman | Published on Nov. 28, 2021
Many or all of the products here are from our partners that pay us a commission. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.
Investing is a great way to battle inflation. Here's what you need to know.
Inflation has been in the news a lot lately, and for good reason. In October, consumer prices were up 6.2% from the previous year. And while this recent bout of inflation has been pretty extreme, the reality is that inflation is a perpetual threat to consumers' buying power.
There are certain things you can do if inflation is making it difficult to keep up with your bills right now. First, you can try cutting back on non-essential spending, like leisure and entertainment (not an easy thing, but a potentially necessary one if keeping those expenses means landing in debt). You can also try getting a side hustle to boost your income and keep up with rising living costs.
But there's another important step you can take to protect yourself from long-term inflation -- invest in a brokerage account.
When you put money into a brokerage account, you can invest that money so it grows into a larger sum over time. If your investments perform well, you might score a high enough return in your brokerage account to outpace inflation. By contrast, if you leave your money in a savings account, you may not get paid enough interest to beat the rate of inflation.
Right now, even the best savings accounts are paying somewhere in the ballpark of 0.50% interest. Granted, rates are exceptionally low right now, but even if they climb to 1% or 2% in the next few years, annual inflation generally sits around 3%. If you're only earning 1% to 2% interest in a savings account each year, you won't outpace inflation on a long-term basis.
Now, let's imagine you invest in stocks through your brokerage account, and your portfolio delivers an average annual 7% or 8% return. That's actually a bit below the stock market's historical average, and it accounts for years when the market does a lot better than its average return, but also, a lot worse. If the general rate of inflation over the next, say, 20 years stays at around 3%, but you earn more than twice that return in your brokerage account, you'll come out ahead financially.
Find the best stock broker for you among these top picks. Whether you're looking for a special sign-up offer, outstanding customer support, $0 commissions, intuitive mobile apps, or more, you'll find a stock broker to fit your trading needs.
Of course, investing in a brokerage account isn't without risk. When you buy stocks, there's no guarantee you'll score the returns we just used in our example, or that you won't lose money. But if you load up on a diverse mix of stocks and hold them for many years, there's a good chance you'll come out ahead financially over several decades' time.
Some people don't invest in a brokerage account because they think it's too risky. But it's important to realize that if you don't take that risk, you'll shoulder another one -- losing buying power in the face of inflation. If you've yet to open a brokerage account, you may want to start researching your options and investing your money to give yourself that edge.
Over the long term, there's been no better way to grow your wealth than investing in the stock market. But using the wrong broker could make a big dent in your investing returns. Our experts have ranked and reviewed the top online stock brokers - simply click here to see the results and learn how to take advantage of the free trades and cash bonuses that our top-rated brokers are offering.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2022 The Ascent. All rights reserved.