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Money Inflation: How Inflation Has Affected Your Money

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Do you remember when you used to be able to buy a regular cup of coffee for less than a dollar? How about gasoline? As recently as 2004, the average gallon of gas cost less than $2. Today, these prices are a distant memory. Inflation is the metric we use to describe the phenomenon of rising prices, which is a basic fact of economic life that you should know about.

Inflation is the gradual increase in the price of goods and services over time. As inflation rates rise, you’ll pay more for the same goods and services, which impacts your daily life, as well as your investments. In the U.S., the current inflation rate is 2.2% as of July 2019.

What is inflation?

Inflation is a general upward trend in the cost of goods and services across the economy, from the price of food to the cost of housing, gas and clothing. As inflation rates rise, the buying power of currencies like the U.S. dollar falls, which means you’ll pay more for a product than you did several years ago.

However, it’s not quite as simple as comparing the cost of milk from one year to the next. Rather, economists determine inflation by looking at the prices of a “basket” of products and services and then measure the average price changes over time.

How inflation affects your money

Inflation impacts the buying power of the dollar, which in turn erodes the value of a consumer’s cash reserves. Each year, your dollars buy fewer goods and services, even if it’s a small change from one year to the next.

While inflation is largely inevitable, there are ways you can protect your money against inflation. Start by looking at your savings account. Up to 99% of savings accounts have interest rates that fall below inflation rates, which means that even as your money grows, it’s not growing quickly enough to keep up with inflation. A MagnifyMoney study found the average savings account rate is just 0.26%, well below the average 2% inflation rate.

You are most susceptible to inflation if you keep large reserves of cash rather than investing your money in vehicles that are more resistant to inflation. Look for investments that have historically appreciated at greater rates than inflation, as well as those that are specifically designed to protect against inflation. Treasury Inflation-Protected Securities (TIPS) are the most direct investments that can help keep your money safe from inflation.

Most bond investments set interest rates that account for inflation, but a TIPS investment has a principal adjustment mechanism increases with inflation and decreases during times of deflation. When your TIPS has reached maturity, you’ll be paid the adjusted principal amount or the original amount, whichever is larger. These investments pay out fixed-rate interest twice a year – the rates also rise and fall with inflation and deflation rates. TIPS are a good way to diversify your portfolio and the most direct way to hedge your money against inflation.

How inflation is calculated

Economists measure inflation with the Consumer Price Index (CPI), which focuses on how inflation affects consumers; the Personal Consumption Expenditures (PCE) index, which is more tightly focused version of CPI; and the Producer Price Index (PPI), which is based on surveys of prices businesses charge for goods and services. These three indices measure the cost of baskets of products and services, and each month reports are published on changes in CPI, PCE and PPI.

In 2016 and 2017, the CPI surveyed approximately 24,000 individuals in the U.S. Those consumers provided the CPI with detailed data regarding their quarterly spending habits, while another 12,000 provided information on their spending over a two-week period.

One easy way to understand inflation is to compare the buying power of $100 over the course of the last several decades. Think of how much rent and other housing costs have increased over the years. Those increases are likely be due to a wide variety of factors, but one of them is inflation and the declining buying power of the dollar. This graph indicates the changing value of $100 in 2019 money:

A closer look at inflation rates historically

As you can see in the graph, inflation has held pretty steady since 1940. However, there are also some aberrations that reflect the state of the U.S. economy at any given time. For example, the economy experienced deflation during the years of the Great Depression through the 1930s, when markets crashed and unemployment rates sat at historic highs. Deflation is the opposite of inflation: When the buying power of a currency increases over time.

You can also see rapid inflation growth in the 1970 to 1980 period. The Great Depression and the 1970s are outside of the norm, and the Federal Reserve Bank tempers inflation rates to keep them around 2%. The Fed aims to keep inflation rates at about this rate to provide greater spending stability for consumers, promote high employment rates and to temper long-term interest rates.

The bottom line

Inflation is inevitable, and it has a direct effect on your money. It’s important to understand how inflation affects your money and to keep an eye on the rate of inflation over time.

Despite the fact that you can’t stop inflation and the impact it has on your cash reserves, you can take steps to protect your finances from inflation. Look into investments that have inflation embedded into their returns, such as as fixed-income securities. You can also explore bond investments that account for inflation in their interest rates and principal payouts, such as TIPS.

Seek out investments that have historically appreciated more quickly than inflation has increased at a rate greater than 2% each year. You may not be able to stop inflation, but by diversifying your portfolio and monitoring the CPI over the years, you can know what to expect and how best to protect your money.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Anne Bouleanu
Anne Bouleanu |

Anne Bouleanu is a writer at MagnifyMoney. You can email Anne here

Advertiser Disclosure

Banking

SIPC vs FDIC: What’s the Difference?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

The Securities Investment Protection Corporation (SIPC) and the Federal Deposit Insurance Corporation (FDIC) each play a major role in consumer financial protection. The two agencies insure banks and other financial entities, so that if a bank were to fail, consumers and their money would remain protected.

The SIPC and FDIC serve different purposes, so you won’t necessarily be making a choice between the two. Rather, you should have an informed understanding of each entity, their similarities and differences and how these agencies can help you protect your money.

What’s the difference between FDIC and SIPC insurance?

While both the FDIC and SIPC insure banks and other financial institutions, they’re not interchangeable, and each serves a different purpose. In broad strokes, the FDIC is an independent federal agency that protects losses in deposit accounts, while the SIPC is a nonprofit membership corporation that protects clients of broker-dealers that are members of SIPC.

Here are a few key differences between the two entities.

 SIPCFDIC
What it is
  • Nonprofit membership corporation founded by federal statute
  • Independent federal agency formed to protect consumers against bank failures
What it covers
  • Stocks, bonds, CDs, Treasury securities, mutual funds and money market mutual funds
  • Deposit accounts (checking and savings accounts), CDs and money market accounts
What it does not cover
  • Declines in investment value
  • Commodity futures, investment contracts or fixed annuity contracts that aren’t SEC-registered

  • Stocks, bonds, annuities, mutual funds, money market funds, municipal securities or life insurance policies
How much it insures
  • Up to $500,000 per customer
  • Up to $250,000 per account holder for each deposit account type

SIPC vs. FDIC: What each one protects

The SIPC and FDIC offer financial protections for consumers. Both serve as essential entities to ensure financial safety for investors, whether large or small. The SIPC and FDIC, however, protect different types of accounts, which is why it’s important for consumer investors to understand what these entities do and do not insure.

The FDIC is primarily concerned with insuring various types of deposit accounts. It covers the following:

The SIPC covers clients of broker-dealers for investments, such as stocks, bonds, and CDs. More specifically, the SIPC covers the following:

  • Notes
  • Stocks
  • Bonds
  • Treasury stocks
  • Evidence of indebtedness
  • Debentures
  • Voting trust certificates
  • Collateral trust certificates, preorganization subscriptions or certificates
  • Puts, straddles, calls or privileges made on a national securities exchange in regard to foreign currency
  • Puts, straddles, calls, options or privileges on a security or collection of index securities. This includes interest made or based on its value
  • Investment contracts, certificates of interest or participation in profit-sharing agreements. These include in oil, gas or mineral royalties or leases
  • Security futures as defined in section 78c(a)(55)(A) of the Securities Investor Protection Act

It’s important to understand that SIPC insurance makes you whole if the firm managing your investments goes out of business. What it does not cover are losses from either bad investing strategy or market downturns. SIPC insurance won’t make you whole if the person managing your money makes terrible investment decisions, or if the account underperforms.

Additionally, the SIPC does not insure commodity futures, investment contracts or fixed annuity contracts that are not SEC-registered.

SIPC vs. FDIC: Coverage amount

Both the FDIC and SIPC also adhere to coverage limits, with coverage amounts differing under the two agencies. The SIPC covers up to $500,000 per customer, while the FDIC protects up to $250,000.

If a financial institution fails, the FDIC will replace consumers’ funds to the dollar up to $250,000, plus interest, up to the date the bank or other institution failed. That $250,000 coverage applies per individual per account account type. This means that if a customer has both a checking account and a savings account at one financial institution, they will be insured up to $250,000 per account, for a total of $500,000 in coverage. For those with a joint account, each individual will be covered for up to $250,000 each, for a total of $500,000 in coverage.

The FDIC provides a tool, called the Electronic Deposit Insurance Estimator (EDIE), that consumers can use to determine what will be insured, what won’t be and which limits and rules apply to an account.

The SIPC, meanwhile covers up to $500,000 per customer, with a $250,000 limit for cash. The SIPC offers limited protections for consumers, only offering protection when a broker-dealer fails. In other words, SIPC will not protect consumers from the decline in value in any securities, bad advice from a broker or inappropriate investment recommendations. Rather, the SIPC will insure investors’ money up to $500,000 per customer, replacing lost securities and stocks if a broker-dealer agency fails.

SIPC vs. FDIC: Which is better?

The SIPC and FDIC operate differently while still serving the same overall purpose of protecting consumer investments. If you hold a diverse portfolio that includes both deposit accounts and securities investments with a broker, you’ll likely need to find institutions that offer both SIPC and FDIC coverage.

Keep coverage limits in mind when making large investments, as that is a risk of this insurance. Remember that the SIPC, for example, will cover up to $500,000 in investments, but will only protect $250,000 in cash. The FDIC, meanwhile, will protect up to $250,000 per deposit account per customer, which means you can potentially protect $1 million across several types of accounts at one bank.

If you’re investing in securities, you’ll need SIPC insurance. When deciding on how to best invest your money, you may want to consider insurance coverage. You can also keep your investments spread across multiple financial institutions, further maximizing FDIC and SIPC coverage.

Neither the SIPC or FDIC directly charge for insurance. As such, consumers won’t pay anything or have to enroll in these programs. The coverage will be applied automatically to their accounts when working with an insured financial institution. However, these costs can be passed on to customers through charges and fees from a financial institution, which customers will not be able to control.

SIPC vs. FDIC: How to know if your account is insured

Not all banks or brokerages are insured. Before you invest or store your money with any institution, make sure it’s FDIC and/or SIPC protected, depending on the type of investment you’re making. Simply put, you can never escape the risk that a bank or brokerage will fail, so you shouldn’t go without FDIC or SIPC insurance.

Use the FDIC website to make sure your bank is backed by the FDIC. Once you’ve confirmed a given financial institution is covered by the FDIC, use the agency’s Electronic Deposit Insurance Estimator to learn the specifics of the kind of coverage you’ll receive. You can then keep that information on record so you can always have the information at hand.

The same applies if you hold securities investments with a brokerage. Check with your individual brokerage firm to make sure they’re insured by the SIPC. If you’re working with a firm that is currently or recently was insured by the SIPC but no longer is, the SIPC will protect your investments for up to 180 days after the brokerage firm ends their SIPC membership. If this happens, you may want to consider switching your investments to another brokerage firm that is insured by the SIPC.

SIPC vs. FDIC: The final word

It’s essential to protect your money, whether it’s stored in a checking account, savings account, a CD or any type of security. The FDIC and SIPC were established to do just that — protect consumer finances.

Every investment is worth protecting, both large and small, short-term or long-term, low-risk or high-risk. Before you commit to an investment or a financial institution, do your research to make sure that if trouble comes down the line, you and your financial future will remain safe.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Anne Bouleanu
Anne Bouleanu |

Anne Bouleanu is a writer at MagnifyMoney. You can email Anne here

Advertiser Disclosure

Banking

Annuity vs. CD: What’s the Difference?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Saving money for the future while growing your nest egg is the core of all financial planning. Developing a portfolio of investments that ensures a strong financial future can be complex, however. Between savings accounts, stock options, bonds, individual retirement accounts (IRAs) and 401(k)s, there’s a lot to consider.

Among these great options are also annuities and certificates of deposit (CDs). Let’s take a closer look at these two products, define how they function and help you decide which one you should choose as part of a solid savings plan.

Annuity vs. CD: What is an annuity?

An annuity is a financial contract between you and an insurance company, primarily used to save for retirement. Annuities assure retirees a fixed stream of income. When working with annuities, you make contributions in a lump sum or through a series of payments. From there, the insurance company will disburse periodic payments beginning at a predetermined date, whether immediately or years down the line.

Annuities are usually sold by an insurance company, which takes your money and invests it for you. Your funds accrue interest over time and grow tax-free, which means you won’t have to pay any taxes on gains from the investment until you withdraw the funds. When you take distributions from an annuity, they are taxed as regular income.

There are three types of annuities — fixed, indexed and variable — and two ways to receive distributions — immediate annuities and deferred annuities. Immediate annuities begin paying you benefits as soon as you fund them, while deferred annuities don’t begin distributing benefits until a future date. Both varieties pay out on a regular basis, and some offer death benefits. If you die before the total annuity has been paid out, a beneficiary may continue to receive payments.

Fixed annuities

Fixed annuities guarantee a minimum interest rate and a fixed number of payments over time. The annuity provider is required to make these payments in a specific dollar amount. You’ll be able to agree to receive payments over an agreed-upon amount of time — 15 years, for example — or for the duration of your lifetime or a beneficiary’s lifetime. Fixed annuities are regulated by state insurance commissioners.

Indexed annuities

Indexed annuities distribute payments to you based on the performance of a stock market index, typically the S&P 500. The annuity provider delivers a payout minimum determined at the time investment, no matter the performance of the stock index over the course of the investment period, plus additional amounts when the index performs well. When the index doesn’t perform well, all you get is the minimum payout. Indexed annuities are regulated by state insurance commissioners.

Variable annuities

Variable annuities offer greater flexibility than fixed or indexed annuities. You may choose to invest your payment into a range of investments, most typically mutual funds. Your payouts and payment periods will differ based on the size of your investment, expenses incurred and investment option’s performance over the course of the investment period. These are regulated by the Securities and Exchange Commission.

Annuity vs. CD: What is a CD?

CDs are offered by banks and credit unions, primarily to save money for short- and medium-term goals. With a CD, you agree to place a fixed amount of money into an account for a set amount of time, called a term, lasting from three months to 10 years. Each financial institution offers different rates for CDs, and the interest paid out generally compounds over the term of the CD. The financial institution pays interest on the CD principal, but the interest is only accessible and paid out to you once the term of the CD is complete.

After the term of the CD ends, you withdraw your funds plus the interest that has accrued. You can purchase CDs through federally insured banks, which insure the investments up to $250,000. This Federal Deposit Insurance Corporation (FDIC) insurance combined with the steady interest growth make CDs one of the safest options for those looking to save for their future.

Annuity vs. CD: What are the differences?

There are key differences between annuities and CDs. First and foremost, these two financial instruments pay out very different amounts on very different payment schedules. When investing using annuities, you’ll have the option to receive regular payments over time, which may include part of the principal investment as well as interest earned. In all but a few cases, CDs pay out principal and earned interest only at the end of the term, once the CD matures.

CDs and annuities are insured differently. The FDIC insures CDs up to $250,000, while fixed and indexed annuities are regulated by state insurance commissions. When buying an annuity, you must research whether your state has a guarantee association that provides some level of protection for when an insurance company in that state fails. Also note that variable annuities are considered to be a security, and as such, are regulated by the SEC. Variable annuities are covered by the Securities Investor Protection Corporation (SIPC).

You need to consider the differing tax treatment of annuities versus CDs. While interest from both investment vehicles are taxed as regular income, the principal from a CD is never taxed. However, with annuities, both the principal and interest are taxed, even when purchased with pretax funds out of an IRA. A set amount of an annuity’s payout that was purchased with after-tax dollars is taxed as regular income, while another portion is not subject to taxes. Annuities offer tax-deferred growth, however, which means you won’t have to pay any taxes on growth until you withdraw the money.

Breaking Down Annuities vs. CDs

AnnuitiesCDs

Payment

Receive portion of principal investment and interest in regular payments over time.Receive a single payment of principal and interest once the CD has matured.

Insurance

Varies on a state-by-state basis, depending on the rules of each state’s guaranty association.Insured by FDIC up to $250,000.

Taxation

Portions of both interest and principal may be taxed as regular income.Interest is taxed as regular income. Principal is never taxed.

Annuity vs. CD: Which should you choose?

Because individuals usually use CDs for terms ranging from six months to 10 years, CDs are a strong option for those who are pursuing short- or medium-term savings goals. People making longer-term plans for retirement down the line, however, may want to do more research on investing in annuities. Because these investments give you the option to receive steady payments for a fixed amount of time, say 20 years or until you pass away, they can act as a good option for retirees who would like to receive regular income payments throughout their retirement. Annuities can act as a partial substitute for income once you’ve retired from the workforce.

Bottom line

When planning for your financial future, you’ll want to consider a variety of investment opportunities, including both annuities and CDs. Everybody’s financial situation and saving goals are unique. Are you looking to invest now to receive fixed payments over the course of 20 years once you’ve retired? Or are you hoping to earn some interest over the course of a year or five in a more secure fashion? Perhaps you’re looking to do a bit of both.

Most importantly, keep doing research. When evaluating your investment portfolio, think through the pros and cons of annuities and CDs, what they have to offer and how they fit into your long-term goals.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Anne Bouleanu
Anne Bouleanu |

Anne Bouleanu is a writer at MagnifyMoney. You can email Anne here