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Inflation vs your savings

Inflation is a slow force working against your financial goals. It can quietly erode the purchasing power of your money over time. While it’s tempting to see cash as a safe haven, failing to factor in inflation could mean your savings are worth less when you need them most.

So, let’s dive into the showdown between inflation and your savings and explore strategies to fight back.

Inflation’s erosion of cash returns

The Reserve Bank of Australia (RBA) defines inflation as “an increase in the level of prices of the goods and services that households typically buy”.

When inflation goes up, the value of each dollar you own decreases, meaning you can buy less with the same amount of money. This becomes a real concern for investors who rely on cash or low risk investments like term deposits, where returns may not keep up with inflation.

For instance, if you’ve placed your money in a term deposit earning 5% interest but inflation is running at 6%, you’re effectively losing 1% of purchasing power. This is what’s known as the real return – the return on your investment after adjusting for inflation. A return of 5% may look good on paper but in real terms it means you’re going backwards.

Long-term investment strategies

So, how can you prevent inflation from chipping away at your savings? One effective approach is to adopt a diversified investment strategy. Diversification involves spreading your investments across various asset classes such as shares, property, bonds and international assets, rather than keeping all your money in cash or low risk products.

Equities, for example, have historically outpaced inflation over the long term. While shares can be volatile in the short run, their potential for higher returns helps them beat inflation over time. Property investments also have a history of delivering inflation beating returns, as the value of real estate typically rises along with inflation. Exchange Traded Funds (ETF) may be a useful way to diversify your investments that are both simple and low cost.

A well diversified portfolio ensures that you’re not overexposed to any one asset class. Instead, you benefit from the potential growth of various sectors, reducing your overall risk and improving your chances of keeping pace with or even outpacing inflation.

Practical advice for investors

Investing during inflationary times can feel overwhelming but there are several steps you can take to safeguard your wealth:

  • Stay informed: Keep an eye on inflation rates and the broader economic environment. This may help you understand how inflation is impacting the real value of your investments.
  • Consider inflation protected assets: such as inflation protected bonds, resource shares and commodities.
  • Review your cash holdings: While cash can serve as a safety net, holding too much in low interest savings accounts can hurt you in the long run. Consider maintaining an emergency fund but limit excess cash holdings in favour of higher return investments.
  • Embrace diversification: A balanced portfolio with a mix of assets can help you spread risk while still allowing for growth that beats inflation.
  • Seek professional advice: A financial adviser can provide tailored advice based on your risk tolerance, financial goals and the current economic environment.

The bottom line

Inflation can have a serious impact on the value of your savings, particularly if you rely on cash or low risk investments. Over time, even a modest inflation rate can significantly reduce your purchasing power.

By diversifying your investments, staying informed and seeking professional advice, you can set yourself up to win in the showdown between inflation and your money.

 

Source: Financial Writers Australia

Hardik Gupta

Senior Paraplanner

Education: Master of Business Administration (Finance & marketing) & Bachelor of technology (B.tech)

Hardik is a financial professional with an MBA in Finance and extensive expertise in financial planning. As a Senior Paraplanner, he brings a wealth of knowledge and a deep commitment to helping clients achieve their financial goals.

With significant experience in the financial industry, Hardik excels in creating detailed financial plans, performing comprehensive financial analyses, and supporting financial advisors with client portfolio management. His strong background in finance provides him with a robust understanding of market dynamics, investment strategies, and risk management, enabling him to deliver tailored solutions that align with each client’s unique needs.

In his free time, Hardik enjoys spending quality time with his family, biking, playing snooker, and exploring new culinary delights through cooking.

Natalie Ybañez

Client Associate

Bachelor of Science in Entrepreneurship

Natalie joined Verity Wealth Solutions after completing her degree in Entrepreneurship. With a leadership background and a history of academic excellence, she brings dedication, initiative, and a strong work ethic to her role.

Natalie supports Verity Wealth Solutions clients with her exemplary administrative work with a focus on assisting with delivering quality advice and exceptional client outcomes.

Outside of work, Natalie enjoys reading fiction, collecting books, and building her own home library. She also loves exploring new places, discovering great food, and creating memories with family and friends.

Jack Wyer.

Financial Adviser

Bachelor of Business – Major, Financial Planning

Jack Wyer is a Financial Planning Graduate who has recently commenced his Professional Year with Verity Wealth Solutions. With a Bachelor’s Degree in Business, Majoring in Financial Planning, Jack has demonstrated high achievement, receiving merit awards in both 2021 and 2022. Jack’s passion for helping others and his desire to see others succeed financially have been the driving forces behind his chosen career pathway.

Driven by his passion for financial well-being and his innate ability to connect with others, Jack is dedicated on making an impact on the lives of others. Through his expertise, empathy, and commitment, he strives to empower people to achieve their financial goals.

Alongside his financial planning endeavours, Jack finds joy in spending quality time with friends and family and wants to slowly visit new countries along the way. Jack is also an avid Soccer player, actively playing for a local team. When it comes to supporting a team, Jack goes for Tottenham in the English Premier League.

Jack Wyer’s Adviser Profile