Read between the lines: What does rising inflation mean for your money?
Each month we will be bringing you a regular column from Simon Read, a personal finance expert with extensive experience in helping people make the most of their money. In his last piece, Simon looked at the changes introduced last month with the new tax year.
Inflation is rising – and is set to climb even higher by the end of the year. Official figures revealed a surprise jump in the headline rate of inflation to 2.3% in March, its highest rate for four years. And it is estimated to climb to 2.8% by the end of the year.
Why is it rising and why should you be worried about it? Inflation is measured by comparing the price of a basket of goods. They represent typical purchases by British people and the way the basket itself changes is interesting. For instance, this year has seen the introduction of gin and cycle helmets to the basket to reflect changing spending habits. Meanwhile menthol cigarettes and fees for stopped cheques have been dropped. As an aside, VHS video tapes were only scrapped from the inflation basket 10 years ago, although it seems like a lifetime since anyone bought them!
The inflation figure tries to reflect the real-life spending patterns and rising – or falling – costs. And rising inflation means it’s getting more expensive to live. It’s been ever thus. However higher inflation is hopefully offset by higher wages, meaning your money should go as far as ever.
But there’s one area where inflation is hitting hard right now – our savings. If you can’t get a savings return higher than inflation, you’re losing money. The cash in your nest egg will be worth less and less as inflation outstrips the returns you get. And right now, no-one can get an inflation-beating rate from traditional banks and building societies with even the much-heralded new Government-backed savings bond paying less than inflation at 2.2%.
So if you don’t want your savings to shrink, you need to do something about it. That means finding better returns. But you can only get better returns by exposing your hard-earned cash to greater risks/Does rising inflation strengthen the argument for investing in peer-to-peer platforms? Of course it does. But it also strengthens the argument for investing in stock markets, where you may be able to get even better returns. For instance, the FTSE-100 climbed from a level of 6200 a year ago to around 7200 now. That’s a rise of 16%. If you’d invested in the right funds 12 months ago, you’d be sitting on returns that far outstrip inflation.
But the key to stock market investing is timing. Get it wrong, and you could face huge losses. For instance if you’d whacked your savings into the market on 20 March, you would have got in when the FTSE stood at 7430. That was the day that the current Prime Minister sent markets spinning by revealing she would be triggering Article 50 just over a week later. If you’d have hung on until 20 April and then sold in panic you would have got out when the FTSE stood at 7118. That would have meant a loss of more than 4% in just a month – not so attractive, is it!
The point is this: while inflation is a worry to savers, the fear of losing your nest egg is greater. It’s not sensible to switch all your savings out of low-paying bank and building society accounts into high-risk shares. The key is to find a balance. Keep your rainy day savings, your emergency money, to hand in a deposit account. Consider peer to peer platforms for your nest egg, cash you may not need for a while. And if you have money you can afford to risk, that you won’t need for at least five years, look at stock market-linked options, such as equity income funds.
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