Inflation vs. Your Savings: Strategies for Financial Success

In personal finance, inflation is the silent enemy. It doesn’t get the same headlines as market crashes or interest rate rises but its steady erosion of purchasing power can have a big impact on your long term financial health. At Virtuous Wealth we believe understanding and beating inflation is key to achieving your financial goals.

The Inflation Challenge

The Reserve Bank of Australia (RBA) defines inflation as “an increase in the general level of prices of goods and services in the economy.” In simpler terms, as inflation rises, every dollar in your pocket buys less than it used to.

This is a big problem for investors who are relying on cash or low risk investments like term deposits. For example, if your term deposit earns 5% and inflation is 6%, you’re actually losing 1% in purchasing power. The difference between your nominal return and the inflation rate is called the real return and in this case it’s negative.

The Long Term Impact on Savings

Over time even small inflation can eat away at the value of your savings. Cash, often seen as a safe haven, can be particularly vulnerable. Having an emergency fund is important but keeping too much in low interest savings accounts can hurt your long term future.

How to Beat Inflation

So how can you protect your savings from inflation’s erosion? Here are some strategies we recommend:

  • Diversify Your Investments: A diversified portfolio across different asset classes – shares, property, bonds, international assets – can help you beat inflation over the long term.
  • Consider Shares: Historically shares have beaten inflation over the long term. While they can be volatile short term, their growth potential makes them a great tool for long term investors.
  • Look into Property: Property investments have a history of delivering inflation beating returns as property values tend to rise with inflation.
  • Check out ETFs: Exchange Traded Funds (ETFs) are a simple, low cost way to diversify your investments across different sectors and asset classes.
  • Investigate Inflation Protected Assets: Consider investments like inflation protected bonds, resource shares and commodities which can be a hedge against inflation.

What to Do

Here are some things you can do to protect your wealth from inflation:

  • Stay Informed: Keep an eye on inflation rates and broader economic trends to see how they impact your investments.
  • Review Your Cash: Have an emergency fund but avoid having too much cash that could be working harder in other investments.
  • Diversify: Build a balanced portfolio that spreads risk and allows for growth that beats inflation.
  • Rebalance: As conditions change, review and adjust your investment strategy regularly.
  • Get Advice: A financial adviser can provide personalised advice based on your individual circumstances, risk tolerance and goals.

Inflation is a problem for savers and investors but it’s not impossible to overcome. By understanding it and using the right strategies you can beat inflation over the long term.

Don’t let inflation silently erode your financial future. Contact us today to schedule a consultation and take the first step towards inflation-proofing your savings.

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