We are experiencing Inflation across the globe, some countries more aggressively than others.
The Bank of England’s target of 2% inflation in 2017 has been surpassed, whilst consumer prices in the UK have barely risen.
Quick Tip: Not sure what Inflation is? Check out this info bite from the BBC
It is forecasted by the bank that consumer price inflation will remain above 2% each year until 2021.
Which is detrimental to the current low-interest era we live in, where most high street banks offer an interest in your account for less than 1%!
It is vital that you understand about inflation and it’s the effect on your purchasing power over time. You work hard for your money, as prices rise due to inflation, your purchasing power diminishes.
We have curated 4 Tips On Beating Inflation In 2019 that you could implement today to help keep your purchasing power in line with inflation and protect the value of your wealth from inflation.
1. Avoid excessive cash in interest-bearing accounts
The huge positive of investing in cash instruments is that they are less risky than other investments available (stocks / real estate etc.)
However, relying solely on cash investments may prevent you from reaching your long-term financial goals.
With inflation being marginally higher than the average interest-bearing account, you are essentially losing money.
What do we mean by losing money?
Let’s take a hypothetical look at this:
Inflation is 2%
Your current interest-bearing account is 1.5%
In terms of purchasing power in a year, you would have 0.5% LESS purchasing power. The real impact here is that your savings will become less over time.
2. Linking income to inflation
Higher inflation can also be bad news for investors in bonds.
Bondholders receive regular income payments, known as ‘coupons’, from the government or company that issued the bond. Where coupons are fixed in value for the life of the bond – often several years – the real value of this income will be eroded if prices rise. The nominal value of the bond (known as the ‘principal’) will also be worthless when it matures and the loan is repaid.
Income from bonds issued by the government or companies will also be eroded by inflation.
The nominal value of the bond will be worthless when the loan is repaid.
To protect against this, there are other bond products that are inflation-linked. The coupons and nominal value will track inflation. The income received will increase in line with inflation and should be left no worse off – unless the bond issuer fails to repay.
That being said, if inflation falls – so will the income.
3. Consider investing in other assets such as equities/real estate/forex
To beat rising prices, the total returns from any investment – being the combination of capital growth and any income – must be greater than the rate of inflation.
Year on year, to beat inflation, the total returns (capital growth + income) must be higher than the rate of inflation. For example:
Stock Market Gains – 5%
Stock Market Dividends – 5%
Inflation – 3%
Total Gains = (5+5)-3 = 7% gain.
This doesn’t include any taxes from income generated and capital gains achieved.
One of the most popular ways to invest is in the stock market which can potentially offer long-term investors capital growth and income. The stock market gains can be greater than inflation and would therefore potentially offer protection against inflation.
However, the stock market can go down as well as up which means that you could potentially end up losing your investments or growing them over time.
Investing in equity, in theory, should be inflation-neutral, as long as the companies can pass on the higher costs they face and maintain profits.
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