Inflation is an insidious force that can undermine your financial objectives. It gradually diminishes the buying power of your money over time. While cash may seem like a safe option, neglecting to account for inflation could result in your savings losing value when you need them most.
Let’s examine the conflict between inflation and your savings, and explore tactics to counter its effects!
The Reserve Bank of Australia (RBA) describes inflation as “a rise in the price level of goods and services typically consumed by households”. As inflation increases, each dollar in your possession becomes less valuable, reducing your purchasing capacity. This is particularly concerning for investors who rely on cash or conservative investments like term deposits, where returns may struggle to keep pace with inflation.
Consider a scenario where you’ve invested in a term deposit yielding 5% interest, but inflation is running at 6%. In real terms, you’re experiencing a 1% loss in purchasing power. This concept is the real return – your investment yield after accounting for inflation. A nominal 5% return may appear attractive, but in reality, it represents a decline in value.
How can you protect your savings from inflation’s corrosive effects? One effective method is to adopt a diversified investment approach. Diversification involves distributing your investments across various asset classes such as stocks, real estate, fixed income, and international assets, rather than concentrating all your funds in cash or low-risk products.
Historically, equities have outperformed inflation over extended periods. While stocks can be volatile in the short term, their potential for higher returns helps them surpass inflation over time. Real estate investments also have a track record of delivering inflation-beating returns, as property values typically appreciate alongside inflation. Exchange Traded Funds (ETFs) can offer a straightforward and cost-effective way to diversify your investment portfolio.
A well-diversified portfolio ensures you’re not overly exposed to any single asset class. Instead, you benefit from potential growth across various sectors, mitigating overall risk and enhancing your chances of matching or exceeding inflation.
Navigating investments during inflationary periods can be challenging, but there are several measures you can take to safeguard your wealth:
Inflation can significantly impact the value of your savings, especially if you rely heavily on cash or low-risk investments. Over time, even a modest inflation rate can substantially reduce your purchasing power.
By diversifying your investments, staying informed about economic conditions, and seeking professional guidance, you can position yourself to triumph in the ongoing battle between inflation and your financial resources.
The information contained on this website has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. You should, before you make any decision regarding any information, strategies or products mentioned on this website, consult your own financial adviser to consider whether that is appropriate having regard to your own objectives, financial situation and needs.