The impact of inflation on personal financial planning

Inflation can be an unavoidable reality for many people that affects the purchasing power of money over time. For those looking to invest or simply preserve their financial health, understanding inflation’s impact is crucial to safeguarding your wealth and achieving your financial goals. This article looks at the effects of inflation on your cash and investments, and offers actionable strategies to address these challenges effectively.

The impact of inflation on your funds

For those holding cash, inflation poses a direct challenge by eroding the purchasing power of that money. As prices rise, the value of money saved remains stagnant, making it increasingly difficult to afford goods and services over time¹. This is particularly concerning for long-term goals, where inflation can significantly diminish the value of accumulated cash. Without proactive measures, people may find themselves unable to meet future financial needs, despite their best efforts to not spend beyond their means.

How investment can be a solution

Investing provides an avenue to counteract the effects of inflation by generating returns that can outpace rising prices. For instance, US and UK equities have historically delivered inflation-beating returns over the long term, making them a valuable tool for preserving and growing wealth². For those looking to preserve the value of their cash, transitioning some money into investment opportunities may be a practical step.

How inflation can impact investments

That is not to say that investments are immune to inflation. While investments can help combat inflation, they are not always secure against its effects. Fixed-income securities, such as bonds, can lose their real value if their returns fail to exceed inflation rates³. Similarly, inflation can lead to increased volatility in certain markets, affecting the performance of specific asset classes. Understanding these risks, as well as other risks of investing, is crucial for managing investments effectively in an inflationary environment⁴.

Why inflation matters in both planning your cash and investments

Accounting for inflation is essential in crafting a comprehensive financial plan. For cash-holders, it underlines the importance of strategies that protect the value of their funds over time. For investors, it highlights the need for selecting assets that perform well in inflationary conditions, such as equities, inflation-indexed bonds, and real assets. Integrating inflation considerations into both cash and investment strategies ensures a balanced approach to financial security.

Potential strategies to counter inflation

• Invest in Global Equities: Stocks often deliver long-term returns that exceed inflation, making them a cornerstone of inflation-resistant portfolios. It also makes you more resilient against local inflation.
• Diversify with Real Assets: Tangible assets, such as commodities, tend to retain or grow in value during inflationary periods⁵.
• Utilise Inflation-Linked ETFs: Instruments such as US Treasury Inflation-Protected Securities (TIPS) adjust with US inflation, preserving purchasing power against the dollar. These often make up a significant proportion of some Inflation-Linked ETFs⁶.

Learn more about ETFs here.

Digital platforms like nsave provide the tools to discover solutions to help protect your cash from high inflation. By offering access to global diversified portfolios and inflation-sensitive investments, they enable users to protect and grow their wealth without unnecessary complexity. Download to take control of your finances.

Conclusion

Inflation affects everyone, whether through savings or investments. However, by understanding its impact and employing thoughtful strategies, it is possible to mitigate its effects. Diversifying your portfolio with inflation-resistant assets and leveraging platforms like nsave can help secure your financial future. Begin preparing today to safeguard your wealth against the persistent challenge of inflation.

Sources:

1. Investopedia: How Inflation Impacts Savings
2. St James’ Place: Investing to beat inflation for the long-term
3. European Security and Markets Authority
4. Investopedia: Understanding Inflationary Risk
5. Morningstar: Are Diversified Real Asset Funds a Good Inflation Hedge
6. ‍U.S. Bank: What are TIPs bonds?‍

Sources last updated: 12-12-2024

_{This article is for informational purposes only and does not constitute financial advice. Investments involve risks, including the potential loss of capital. Past performance is not indicative of future results. Each investor is responsible for making their own decisions and should seek advice from a licensed financial advisor or qualified professional if uncertain.}