Inflation is the enemy of savers
Written by R. A Stewart
If the return on your investment does not keep up with inflation your money will lose it’s purchasing power, therefore you must invest for a return which is greater than the inflation rate. This does not mean that you should speculate and take unacceptable risks with your money but rather make investments which have the potential to grow in the long term.
Imagine if you left $5,000 in an ordinary savings account for 20 years earning 0.5% interest, but the average inflation rate during that period was 3% your $5,000 may still be intact but it has lost over half of its purchasing power.
You may not have been robbed in the normal way of thinking but the value of your $5,000 was eroded by inflation.
When goods and services rise in price, this is inflation, your money buys a smaller percentage of those goods and services.
The Rule of 72: A quick way to see inflation’s destructive power is the Rule of 72. Divide 72 by the current annual inflation rate to find out how many years it will take for your money’s value to cut exactly in half. At a seemingly mild 3% inflation, your wealth loses half its purchasing power in just 24 years. At 6% inflation, that devastation happens in a mere 12 years.
Inflation does not treat all assets equally. It penalises those who have left their money in low interest accounts but rewards those astute investors who have made the right kind of investments.
It therefore acts as a redistributor of wealth.
Wealth erosion is just not about the investments you make, it is also about the cash flow. If your costs this year are up 5% but your employer gives you a pay rise of 3% you have less cash to spend for your day to day expenses.
Inflation forces people to take risks with their money which they are not comfortable with just to keep pace with the falling spending power of their money. You are forced to move your money into the stock market, real estate, or other volatile assets just to protect its baseline value. This exposure to market crashes and liquidity issues is a secondary, structural risk that inflation inflicts on everyday savers.
To protect their wealth people must shift their focus from being a saver to being an investor. Historically, certain assets have acted as excellent shields against inflation. Equities (Stocks) have acted as an excellent shield against inflation because companies can just raise their prices in line with the inflation-rate, this flows through to investors in these companies.
Inflation is a mandatory feature of modern economics. You cannot stop it, and you cannot opt out of it. The only variable you can control is how you store your wealth. By recognizing that cash is a melting ice cube, you can structure your financial life around assets that grow faster than the cost of living—ensuring that the wealth you build today is still meaningful tomorrow.
This does not mean that you should start taking unnecessary risks with your money and look for investments with a high return because you will be vulnerable to online scammers who target the greedy. The rule is, “If it sounds too good to be true, it most certainly is”
Having the common-sense to discern a good investment from a bad one sometimes takes a bad experience. It is important to read books by reputable financial writers to get a handle on investing strategies.
Another way to reduce the effects of inflation on your finances is to reduce your discretionary spending. Most discretionary spending is on stuff which does not add value to our lives and is worth only a fraction of what you originally bought them for.
It is important to point out that your strategy for dealing with inflation must be one suited to your personal circumstances, therefore discretion must be exercised when taking advice.
All of the best with your finances.
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Working in your chosen field
You may not have the talent or inclination to be an international sportsperson but you can be an asset in your chosen field and that does not mean that you have to be something out of the ordinary to become a valued member of society. A person who works at an entry level job can do so with such a good attitude that their diligence will not go unnoticed by their employers.
You may not particularly like your job and have any control over what happens at work but your attitude is something you can control. An employer with a bad attitude will take that bad attitude with them wherever they go.
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