A-Train Finance

With all of the recent news about the economical downturn this year, the stock market has been down, the Fed was freaking out and the world over has been worried about a pending and overdue U.S. recession. On the day that would have been the largest drop in the stock market since the bubble burst, Mr. Bernake jumped in before the market opened and gave us a surprise rate cut of 75 points, followed by another drop of 50 points on the regularly scheduled meeting. The central bank interest rate now sits at 3.0% which means a few things. For one, those of us with online savings accounts such as Emigrant Direct or ING Direct will now be getting a lower return on our money. The amount that banks pay out in interest is directly affected by current interest rates and at what rate the bank is able to loan out money. As they begin giving out mortgages and loans for lower interest rates (which will help the economy.. think cheaper mortgages for people to buy houses, lower rate loans etc.) they must make sure to keep their margins as high as possible, thus reducing the interest paid to us savers.

The rate cut also means that inflation will increase. Inflation is defined in Wikipedia as:

‘The rise in the amount of money circulating in a given economy over a period of time resulting in a general rise in prices. It is measured as the percentage rate of change of a price index.’

So as more money is circulated into the U.S. economy goods and services will become more expensive. Unless you are working somewhere that compensates for inflation by giving 3% raises every year, that means that the products, food and services that you buy and use will increase in price but you’ll still be stuck with your same income.

So what happens to the money that you have saved up? It loses value.

‘Oh no! I worked so hard to earn and save up that money! Is there anything I can do?’ you say. Why, I’m glad you asked. Yes there is something you can do. By putting your money into high interest savings accounts and investing it in the stock market you can offset the effect of inflation from decreasing the value of your money. By increasing the value of your investments and savings, it usually can either match or beat the negative percentage that inflation attacks your savings with.

On a longer time horizon, it’s always a good time to invest but now specifically is a great time to get started if you haven’t already! Check out a great post on inflation over at Dax Desai’s website.