Imagine going to sleep with, let’s say, £50,000 safely held in your bank account. Then, you wake up the next day full of beans, only to find that the value of your bank account is now £47,500. Your cash has been robbed of 5% overnight.
You’d understandably be straight onto the bank to request an urgent investigation to get your money back.
Next imagine agreeing to buy something for £50,000 on one day, but then returning the next day to complete the purchase and the vendor says “sorry, this is now worth £52,500 and you don’t have enough”.
Understandably, you’d be furious and feel a sense of injustice.
What is the difference between these two scenarios? Both are short by £2,500 or 5%, both feel deeply uncomfortable and unfair, and you’d want to make sense of it all.
The first scenario is likely to be a criminal act whereby your money has been taken. You won’t stop until you understand what has gone on and until someone has been held accountable.
The second, well no criminal act is at play here, the cost of the item has simply gone up. This isn’t a scene from a dystopian novel; it’s the reality of inflation. A silent thief capable of eroding your purchasing power without you even noticing.
In today’s ever-changing economic landscape, understanding and planning for inflation is not just wise; it’s essential for safeguarding your financial future.
Imagine saving diligently for a dream holiday or a comfy retirement, only to find that when you’re ready to use this money, it doesn’t go as far as you planned. Your savings, while growing at a modest rate in your account, will be losing value in the real world due to inflation.
For those with investments, inflation can be a complex challenge. It is important to recognise that not every investment is equally effective at combating inflation. Certain investments may not appreciate quickly enough to surpass inflation rates, potentially resulting in a difficult game of catch up that can be challenging to overcome.
How to keep the silent thief away
1. Diversify
Diversification isn’t just a buzzword; it’s your shield against inflation. By spreading your investments across a globally diversified and well-constructed investment portfolio is the only way that has proven to beat inflation over the longer term.
Equities offer you a share in the growth of the great companies of the world. These great companies, run by the most talented individuals on the planet, historically provide higher returns compared to other conservative investments like bonds or savings accounts.
2. Compounding
Think of compounding as your financial growth engine. By reinvesting earnings, you can accelerate the growth of your investments, aiming to outpace inflation and increase your real wealth over time.
Maintaining a healthy cash reserve is equally as crucial. It ensures you have readily accessible funds for emergencies and unexpected costs, avoiding the need to liquidate investments at an inopportune time. Balancing a sensible cash reserve while investing as much of your surplus as possible, allows you to secure and grow your wealth efficiently.
Inflation may be an unavoidable part of the economic environment, but it doesn’t have to derail your financial goals. A financial plan is a powerful tool in helping you understand the impact of inflation on your ability to achieve what is most important to you.
With the right planning, strategies, and actions, you can not only protect but enhance your purchasing power. Remember, the key to outsmarting inflation lies in staying informed, being prepared, and making proactive financial decisions.
I hope you enjoyed this post. If you have any questions, please get in touch.
