You usually notice inflation when you go to the store to do your weekly shopping and see that the price of your grocery basket has increased, even though the items you bought haven't changed. However, this isn't the worst thing because inflation is also eating away at your savings for the future. In this case, you should already understand how to try to protect your savings from the effects of inflation. If you need expert advice, visit ICOholder and learn how to invest in cryptocurrencies.
Why is inflation bad for your money?
Inflation means the prices of things like your weekly shopping and services and your energy bill are rising, so the money you earn needs to catch up. It also means that your savings will have less purchasing power in the future.
Considering inflation is important when you have long-term goals, such as retirement savings. If your retirement money doesn't keep up with inflation, you could face a lower standard of living when you retire.
What is high and low inflation?
If you hear that the inflation rate is high, it means that you can buy less this year for the same amount of money as you could last year.
Inflation is measured as a percentage:
- If the inflation rate is 1% (lower inflation), the purchasing power of money will be 1% less in a year.
- If the inflation rate is 5% (higher inflation), the purchasing power of money will be 5% less in a year.
High inflation reduces purchasing power faster than low inflation.
Is it possible to beat inflation?
Depending on your circumstances, you may want a product that beats inflation. But your goals may be such that you don't need to worry too much about your savings depreciating.
This is because, in general, you may need to take on more risk to earn a higher return.
If keeping your money safe is very important to you, you may choose an account with a lower interest rate and grow your savings by adding money each month.
Consider your savings goals to find out what's right for you.
As a general rule, for short-term goals where you plan to spend the money within five years, it's safer to choose a savings account and not worry too much about inflation.
For long-term goals, you'll need to factor inflation into your investing.
How to Protect Yourself from Inflation
Some savings accounts are indexed, meaning they will pay interest that tracks inflation but won't always match other interest rates.
They become more expensive when markets expect inflation to rise, so the overall return may not beat inflation.
There's no surefire way to protect your money from the effects of inflation.
The only rule is that cash savings accounts are generally not the best place to put your money long-term—the interest rates are almost always lower than inflation, so your purchasing power is reduced.
Savings accounts still have their place, especially for money you want to spend soon.
But investing may be a better option if you plan to save for five years or more.
Find the best interest rate on your savings
Make sure all your cash savings are getting the best interest rate possible. These days, you can switch between savings accounts and ISAs relatively easily. But if you decide to use an ISA and want the best rates, you may have to commit to a particular product for a year or more. Generally, the longer you're willing to commit to it, the better the rate you'll get.
If you decide to take out a long-term ISA, set a reminder when it's ending so that (if you want to put your savings into another ISA) you can look around and find the best new offer. You can find out more on most banks' websites and compare interest rates on comparison websites.
Invest in short-term stocks
It's a good idea to have at least six months of your essential expenses as an emergency fund. This fund should be kept in an easily accessible savings account so you can withdraw it instantly when needed.
Savings account interest rates vary, so shop around for the best rate. With large sums of money, a difference of just 0.5% can greatly affect your income.
Shift Long-Term Savings into Stocks
Consider whether you can shift some of those funds into investments with better potential for long-term growth for savings beyond your emergency fund and short-term needs.
Historically, stocks have been the best long-term investments for beating inflation, but you must understand that your investments will rise and fall in value.
Choose Investments Wisely
There are other investments that offer the potential to reduce inflation risk, provided you know where to look. For example, you might consider certain types of bond funds that invest in debt issued by governments and/or companies looking to raise money.
Bonds pay a fixed interest rate, a coupon, over their term and must return the original capital at maturity. Bond funds invest in various debt securities to spread the risk.
Real Estate
Real estate can have inflation-reducing benefits. When you own an investment property, you will benefit from any increase in its value, but you can also earn monthly rental income.
Like any investment, real estate can go through periods when prices fall and rise again.
Commodities
During periods of high inflation, the value of commodities such as gold and other precious metals, raw materials such as steel, and agricultural products such as corn can increase.
You can aim for higher returns by investing in commodities themselves or choosing funds or exchange-traded funds (which trade throughout the day rather than having a fixed price after the market closes) that focus on commodities.
Seek Expert Advice
A sound investment strategy should include owning a wide range of assets and using tax-efficient investment vehicles. Knowing what is right for you isn't always easy, and sound advice can help.
Seek expert advice to help you structure a diversified portfolio that meets your long-term financial goals and helps protect against the effects of inflation.