The theme this week on the One Minute Retirement Tip podcast is could you pass this basic financial literacy quiz? 

Today’s financial literacy quiz question is: Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?

The correct answer is less, and the reason why is inflation. In the above scenario, prices grew by 2% - so bread, gas, milk, light bulbs - everything is now slightly more expensive than it was a year ago. 

When I was a kid, I used to live within biking distance of a 7-11, and I could ride my bike there with my neighbors and buy those individual packs of laffy taffy for 5 cents. That was in the early 1990s and prices have gone up a lot in the last 30 years. But if prices are increasing at 2% and your money in the bank is only making 1%, you’re actually losing money in REAL dollar terms. You may have made money - your $100 is now worth $101 a year later, but that $101 doesn’t buy you as much as your $100 did last year, so you LOST money after accounting for inflation.

It’s very important to understand inflation because it will ensure that you don’t invest in just canned food, gold coins, and guns to protect yourself for the future. Investing in stocks is essential to helping your money grow more than the rate of inflation, and if you understand the damaging effects of inflation, you can make smarter decisions about how you invest your money.

That’s it for today, Thanks for listening! 

My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance