Strategy 2 for Beating Inflation

This article is the second part of a two part series that explains the problems of inflation to the average person and two strategies to help that person beat inflation. I hope that the information will not be too economics based and will actually be practical advice that the reader can utilize. This first part can be found here.

Inflation Interpretation - Reminder

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Let us say for example that you have an annual income of £20,000. You also have £10,000 of savings in a savings account that receives an annual rate of 5% (I wish!). However, inflation is rife at 10%.

For your spending habits, this means that if you buy the exact same goods as last year you  will only be able to buy 10% less. This will feel like you can only spend £18,000. This led us towards our first inflation beating strategy and that was to increase your spending power by finding cheaper non-branded goods so that the effects of inflation would not harm you personally.

For your savings this means that you are actually losing money! This year you will gain £500, however you will have lost £1,000 in spending power. This amounts to an overall loss of £500 in the spending power of your savings. This is where we turn to our second Inflation Beating Strategy.

Inflation Strategy

It's really annoying when you work, earn and are sensible enough to save, but then inflation begins to erode away your efforts. As you can see in the example above, that if you save you are actually losing money. Some would argue at this point that you should just spend all your money. That way you get to boost your spending power and not have savings eroded. However, this is not the frugal way and it's hardly the path to becoming a multi-millionaire.

The simple savings saving strategy is to move your savings into a higher risk return financial product. This seems to be the only way to retain your savings. Now, some people may not like the idea of higher risk. However I would ask that person: would you rather lose money for sure (this is inflation) or take on more risk to potential lose more money but also potentially gain more (moving to a higher risk investment).

Still not convinced?

The only way that I think I can appease your worry is to tell you that if you are ever going to invest in a potentially higher reward financial product you are going to have to accept more risk. There are no two ways about it. If it looks too good to be true, then it is. There is always more risk with higher returns. However you can mitigate this risk through diversification (buying multiple different asset classes - the old 'don't put all your eggs in one basket'). Furthermore, you should be willing to invest for the long term, say 5 to 10 years. This should allow for whichever asset class you are investing in to truly demonstrate its worth. For ideas on investing read some of my previous articles.

Readers, do you just accept that you will lose savings or bite the bullet and take on more risk? Please share in the comments box below.

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