Beating inflation through investing

Investing is simply defined as using your money to buy something with the intention that it could grow in value. Now, what's inflation? And what’s it got to do with investing?

We all know the price of most things goes up over time—from clothing to groceries, home goods, and gas. Even your morning cup of coffee is more expensive now than it was not long ago. This is inflation.

How to beat inflation

In order to beat inflation, your money needs to be able to grow at the same pace or faster. This helps you hold onto what's called your "buying power." For example, if the rate of inflation was 4% per year, you could beat it if your money increased by 5% in that time. So the question is, what can you do with your money that might give it that potential?

How can investing help you beat inflation?

Think about it this way: Maybe today you buy cup of coffee for $2.50. However, a few years from now that same coffee might cost $2.75, so your $2.50 will no longer be enough to buy it. With inflation, you're not able to purchase as much in the future with the same amount of money. The 25-cent bump in coffee may not seem like much now, but as prices rise for the things that you spend your money on regularly, those increases add up!

Here's the bottom line: It's important to find ways to help your money grow, or you could start to lose your buying power over time. Money in a bank account will generally pay you small amounts called interest, but it may not be enough to keep up with inflation.

On the other hand, money that's invested in stocks, for example, has a much greater opportunity for growth (but also greater potential for risk, as the value of stocks goes up and down).

Historically, though, money invested in the stock market has grown significantly more in the long run than money sitting in a bank account. So, buying investments that have the potential to increase in value to keep up with (and even beat) inflation can help you protect your buying power.