Is Your Money Keeping up with Inflation?

Have you ever truly considered the impact of inflation on your savings? Or how much would one dollar now be worth in 20 years’ time? Inflation is the rise in the price of goods and services in an economy over a period of time.

The rate of inflation is important. It represents the rate at which the real value of your money is eroded and the loss in spending or purchasing power over time. Inflation also serves as a guide in exactly how much of a return your investments need to make for them to maintain their standard of living and minimize the impact of inflation.

If inflation is not carefully considered and then managed properly, its impact has the potential to undo much of the good groundwork you have laid when accumulating your savings. If the price of goods and services rises faster than your income and your savings, both your purchasing power and your standard of living will fall.

No one can exactly predict where inflation will be in the future and for those who are globally mobile there is the added complexity as to where we may retire and what the impact of inflation is likely to be. One way to offset the impact of inflation is to direct some of your money in growth assets such as shares and property. These assets tend to grow in line with the general rise in prices as well as are likely to deliver greater returns over the medium and long term, so the value of your money will likely outpace inflation. They are a good hedge against inflation!

From an investment point of view, the ‘real’, after-inflation return is the most important because this figure determines what your money will eventually buy. There are two categories of interest rates when it comes to measuring the return on your investments; nominal interest rates and real interest rates. The nominal interest rate is the growth rate of your money, while the real interest rate is the growth of your purchasing power. Your real rate of interest (or return) is the nominal rate reduced by the rate of inflation.

Make sure when you’re planning for the medium to long term and considering your savings and where to invest, inflation is front of mind.

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