Inflation - the Dripping Tap

Everyone has heard the word “inflation” being banned around. But many people don’t understand the true impact it has on our lives when it comes to our income, investments, pensions and all things money.

Many are aware that inflation is the steady increase of goods and services over time. For example a pint of milk was 20p and is now 80p. Your gas and electric bill last year was £1350 and is now £1500. But if we truly knew how much this impacted us, we would take more action to combat it?

 

We are lead to believe that the cost of inflation is covered by the increase in our wages and income over the years. But this is rarely linier. For example, in order for our wages and salaries to keep up with inflation it would need to have a direct correlation and go up by the exact percentage every time inflation increases. This would in fact not make us anymore money. But would only ensure that we don’t effectively lose money each year.

As it stands the average UK salary for 2017 is £27,600. Back in 2007 the average UK salary was roughly 23, 400. This is an average grow rate of less than 1.9% per year over this 10 yr period. Yet the average inflation rate over the past 10 yrs has been 2.35%. Thus suggesting that the average UK resident is in fact becoming poorer and poorer each yr (judging by the above statistics). Even when it comes to saving, your money is in fact being eroded yr after yr.

Consider the below table.

You can see from the above table how quickly £100 becomes devalued over a 5 yr period due to inflation, even in most savings accounts. Hence why a millionaire today is not nearly the same as a millionaire 50 years ago.

The above table shows that it’s important to not only understand how inflation works, but from here you can start to work out how much is required to not only combat inflation, but also save and invest for the future.

1% from a savings account ISA will help slightly, but it’s not going to stop the bleeding (as you can see from the table above). Therefore, it would be wise to identify investments for savings that help combat the rate of inflation. There are a number of ways to invest against the erosion of your savings and or income. Here are a few listed below (assuming your returns are higher than inflation rates):

  1. Higher interest ISA’s

  2. Stocks

  3. Bonds

  4. Property investment

  5. Crowd funding and private loans (where people loan funds at a high rate of interest).

What you decide to invest in depends on the levels of risk you wish to take and your understanding of that particular investment strategy. However, the more you know and understand an investment class, the more this will greatly reduce your risk and uncertainty.  It is also wise to diversify across a few investment/ asset classes as well, but as always do look to seek professional advice.

We will go into diversification and couple of these investment classes in more detail in our next articles. For now, it’s important to remember that if you are not beating the rate of inflation, then your savings and money are like a dripping tap that’s losing value every day. The question is, are you going to fix the leak and if so… How?