Lesson 1: Invest to meet your financial goals and beat inflation
Why your money needs to work harder for you.
CIBC Investor’s Edge
4-minute read
Do you ever feel like your money isn’t working hard enough for you? If you’re keeping your savings in a low-yield savings account or under your mattress, you might be missing out on an opportunity to grow your wealth.
Saving part of your paycheck is a good start to a healthy financial future. For very short-term goals like buying concert tickets or a new phone, a bank savings account is a good choice. However, money that sits in a bank account, earning very little interest, could have the potential to work harder for you elsewhere.
The alternative to putting your money in a traditional savings account is to invest it in financial assets such as stocks, ETFs, mutual funds and bonds. These investments allow you to grow your money to potentially match or beat the rate of inflation. At the same time, investing can help you meet various longer-term financial goals, such as buying a home, funding education, or planning for retirement. When you invest, you’re aiming to earn returns that exceed the rate of inflation and increase your wealth over time.
Inflation is a measure of how quickly the prices of goods and services are rising. As prices rise, the value of your money drops, because you can buy less with the same amount of money. Sometimes we enter a period when prices of all goods and services are rising. At other times, only certain prices rise: maybe a tropical storm has raised the price of bananas this month, or a war has impacted the oil supply.
Higher energy prices in particular can have a ripple effect on the prices of many other goods and services that need energy to function. Think of airlines or food prices that can be impacted through higher transportation costs.
With any of these scenarios, higher prices mean each dollar you have buys less.
Let’s illustrate with an example: Imagine you have $10,000 in your bank account and you’re thinking about some condo renovations that will cost $15,000. You decide to wait until you have the full amount, and you know it will take you a year to save another $5,000.
One year later, you have $15,000, but when you go to hire the contractor, they quote you a new price of $15,300. A 2% inflation rate has affected their costs and they need to charge more just to keep up. Your renovation cost has increased by 2%, but the $15,000 you saved in a bank account hasn’t increased to the same extent.
This example is just over a one-year period. Imagine what happens over the 30-plus years many people have until retirement. With just a modest 2% inflation rate each year, that contractor could be charging you over $27,000 for those renovations in 30 years.
How much inflation is normal?
The inflation rate is affected by many factors and it’s difficult to accurately predict its future path — but looking at past averages can provide some guidance.
The average annual inflation rate in Canada from 1970 to 2000 was about 5.3% a year, but this includes a very high inflation period in the late 1970s and early 1980s. From 2000 to 2022, inflation averaged just over 2% a year, with a slightly higher rate of 2.5% between 2022 and 2024 following the COVID pandemic. The high and low of the inflation range over the past five decades was 12.5% in 1981 and 0.2% in 19941.
Growing your money to battle inflation
The way you invest your money goes a long way to determining whether you’ll keep up with inflation — that is, whether your investments will grow at least as fast as the inflation rate. Some investments might grow quickly and potentially make you more money in the short term, but they will probably be riskier and come with a higher chance of losing money. Each investment has its own level of potential gains and potential losses — this is also known as its predicted return and its risk. Usually, investments with higher potential returns are also riskier. However, if you won’t need this money in the short term and can therefore keep it invested for a longer period, it might make sense to consider investments with higher potential risk.
Understanding the difference between the return and risk potential of different investments is crucial and will make it easier to choose the right investments for a particular investment goal. We’ll explain this idea in more detail in the following Investing 101 Lessons.
