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When deciding where to invest, Dave Ramsey urges you to think about the impact of inflation. Read on to learn why.
In recent months, Americans have been getting a good demonstration of the devastating impact that inflation can have.
Inflation hit a 40-year high last year. The price of many goods and services substantially increased due to factors such as the interruption of normal supply chains due to the pandemic, as well as increased demand due to stimulus payments and people not having much to spend money on for months.
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While this level of inflation was unprecedented, the reality is that the cost of goods and services goes up regularly. And, that’s why Dave Ramsey warns against a money mistake that could leave you ill-equipped to deal with this natural economic phenomenon.
Dave Ramsey has an important warning about where to put your money
According to Ramsey, many people make a big error when it comes to their money. They assume that they can avoid the risk of loss by putting most or all of their assets into a CD, savings account, or an annuity — and they shy away from investing in a 401(k) or brokerage account because they are scared of facing potential losses.
“If you bury your hard-earned money into a savings account or CD hoping to avoid risk, guess what? You may have avoided short-term risk, but you’ve also guaranteed that your money won’t grow enough to keep up with inflation long term,” Ramsey said. “Which sounds riskier?”
Should you listen to Ramsey?
Ramsey is absolutely right on this important issue. While it might feel safer to stash all your money in accounts where you can’t lose it, the fact is that if the interest you are earning on your investment is below the current rate of inflation, you are slowly losing a little bit of money all the time.
To take a really simple example, say you were earning 1% annual interest on $100 and inflation was 2%. At the end of the year, you would have $101 but you would need $102 just to be able to maintain the same buying power that your $100 had at the start of the year.
When you have bigger numbers in the form of more money invested or a bigger gap between your interest earned and the rate of inflation, the effects of this become even more dramatic. You could end up losing a ton of buying power and effectively becoming poorer than when you started out by sticking your money in a savings account or a CD or annuity with a low rate of return.
To make sure you are growing your wealth rather than slowly seeing the value of your savings decline due to inflation, you need to avoid the money mistake that Ramsey warns about. You should have some money in savings — enough to cover emergencies or short-term purchases.
But if you are putting away money for any long-term goals and you won’t need it for the next couple of years, your money belongs in a brokerage account where you can invest it in assets that can produce high enough returns not just to keep pace with inflation, but to beat it and grow your account balance over time.
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