Inflation
Inflation is another reason you may want to invest rather than use a savings account to meet your long-term financial goals. Because the rate of return you realize on savings accounts is generally fairly low, you risk falling victim to inflation, or the gradual decline in the purchasing power of the dollar. Inflation has averaged 3% annually since 1926.
For example, if you put $10,000 in a money market account earning 2.5% interest, your account would have $15,676 after 18 years. If inflation averaged 3% per year, your account value would have approximately $8,500 worth of buying power.
But if you’d invested the money in a portfolio of stocks with an average annual return of 8% for 18 years — a realistic historical long-term return for stocks, though not a guaranteed rate — you’d have $40,000. After accounting for 3% inflation that would produce more than $21,500 worth of buying power. |
Louise Yamada, 
