Should you still be saving money with inflation at 7.7 per cent?

With inflation reaching a 40-year high of 7.7%, many Canadians have been left in a state of worry. Not only about the rising prices of consumer goods, but whether or not they should continue to save money.

It’s a stressful time right now, financially, for many people. The stock market has been tanking, and real estate looks like it might finally start falling due to high interest rates. On top of that, inflation has been running rampant and everything is more expensive.

I had a friend ask me this recently: “What’s the point of saving money right now since my money will be worth almost 8% less in a year?”

Well, there’s a lot to unpack here. It’s not such a simple question, and it depends greatly on your circumstances. Let’s take a closer look.

Situation One: If you are in debt

• If you’re in debt, your main focus should be to get out of that and pay that down before anything else. If it’s a high-interest credit card, you’ll be paying upwards of 20%, and no savings account will get you anywhere near that rate.

Situation Two: If you have no savings

• I would say with a resounding yes that you should continue to save if you are living paycheque to paycheque. Having an emergency savings buffer of three to six months' worth of expenses should be the bare minimum.

Situation Three: If you are planning to purchase something in the near future

• If you have an emergency fund already but need to buy something in the near future, such as a vehicle, a home, a wedding, or a vacation somewhere, it’s a pretty simple choice: you should save money for it. Investing your money will only be putting it at risk and if you need it for something tangible, it’s best to save it in a safe place.

Situation Four: Deciding between investing and saving

• Here is a tricky decision during this high inflationary time, whether or not you should invest or save your money. If you have emergency funds, and some extra cash as well, you might be wondering whether or not you should be investing it right now.

If you believe in the stock markets or whatever you are investing in, and think the markets will turn around and rise again, then you should consider investing. However, it might be better to save if you’re unsure of what to do or are hesitant to invest during these uncertain times. It depends on yourself and your risk tolerance. You might want to consider getting a financial assessment done by a professional, or there are several free online ones available.

• How much money do you need to live as a digital nomad?

I’m in situation four. I have plenty of emergency savings and investments. I have excess cash every month. I am choosing to invest in the stock market. I have a higher risk tolerance and am confident that the markets will turn around in the long term.

Though it’s not wrong to want to save money in a savings account, which I have considered. A savings account is still a good idea for a couple of reasons:

1. With all of the interest rate increases the bank has planned for this year, interest rates on savings accounts should also increase.
2. The inflation rate might go down, given all the interest rate increases that the Bank of Canada has planned.

Some pro tips for saving money in Canada:

1. Look beyond the big banks in Canada. The companies tend to give meagre rates, even on their high-interest savings accounts.
2. Check out other providers of high-interest savings accounts. For example, some providers might provide rates higher than any of the big banks, and no minimum investments are needed.

In summary, I don’t think right now is the wrong time to be saving money for anyone. Unless inflation gets significantly worse and raising interest rates doesn’t fix it, I would say to continue saving.

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.