Since cash doesn’t rise meaningfully in value, it may not keep up with inflation. Inflation refers to the annual increase in the price of goods. Historically, the cost of everything from groceries to clothing rises between 2% and 3% per year. Here’s an example of how inflation could decrease the value of your cash:
Let’s say you plan to buy a new computer next year and so you put $1,000 aside in a bank savings account to buy a new PC, which also costs $1,000. At the end of the year, you might have about $1,010 in the account with the bank providing 1% interest. But, if inflation rises by 2%, then the PC might now cost $1,020 — which is $10 more than you saved. Now think about all the things you want to do in retirement and how much it could all cost in the future if inflation continues to rise by 2% each year. If your money is in cash versus market-based investments that have the potential to generate higher returns, your savings may not cover your future cost of living.
Holding cash in a bank chequing or savings account over time won't increase much in value. If it does, it rarely keeps up with inflation. A better option to consider might be to put your money in a market-based GIC or Mutual Fund—where returns can be potentially higher. Learn the differences and details in this interactive video.