Inflation has been hot topic in the last few months. But though most Brits have probably heard of the term, it appears that many are unsure of what it means and the long-term impact that it might have on their finances.
So, what exactly do Brits need to know about inflation and its effect on their money? And what can they do to protect themselves?
What is inflation?
Inflation is a measure of the rise or fall in the prices of goods and services.
If the prices of goods or services rise, the same amount of money will buy less over time. In other words, your spending power will be reduced.
To compensate for this reduction in spending power, savers must ensure that their savings grow at least at the same rate as inflation, if not faster.
Are Brits aware of how inflation works?
It seems that few are.
According to Wesleyan, nearly half (47%) of us aren’t sure what inflation is, while nearly three in five (57%) aren’t aware of how it might affect their cash.
This is especially concerning given that economists have recently raised their UK inflation forecasts for 2022.
The Bank of England’s base rate is currently at 0.1%, while inflation has recently hit 4.2%, with the BoE expecting it to peak at 5% next year. This means that money left in basic savings accounts that track the BoE’s base rate will lose value over time.
As Martin Lawrence, director of investments at Wesleyan Group, says, “Keeping cash in savings accounts during a period of rising inflation and low interest rates, such as we have now, means your money is in effect losing value.”
Standard savings accounts, where interest rates tend to be much lower than inflation, are currently most Brits’ preferred saving option (49.5%).
To add insult to injury, many Brits (33%) are unaware of the current rate of interest they are receiving from their savings account, making it difficult to assess how their savings are performing in comparison to inflation.
How can Brits protect their savings from inflation?
If you can afford to lock away your money for a significant period of time, say five years, it may be worthwhile to consider investing at least a portion of it in stocks and shares.
Over the long term, the stock market has not only delivered returns that beat inflation, proving itself to be a solid hedge, but it’s actually helped many investors build wealth.
However, only 13% of British adults have invested their savings in stocks and shares. An even greater number (38%) are unaware that investing is a potent hedge against inflation.
What are your options when it comes to investing?
There are numerous investing options out there. You might choose to invest in the individual shares of specific companies. Alternatively, you could choose to invest in a multi-asset fund. This typically contains shares in a collection of companies as well as other assets, such as bonds or property.
A fund can be a good option for those who don’t have the expertise, time, or inclination to personally pick stocks. With a fund, most of the work is done for you by professional managers whose primary goal is to achieve the highest possible financial returns while minimising risk.
Whatever you decide to invest in, consider doing so through a stocks and shares ISA. This is a tax-free wrapper that shields your investment gains from tax, allowing you to keep more of your money.
Just keep in mind that there are no guarantees in investing. Your investments can rise and fall in value. You may even end up with less than you put in. Before you put your money into any investment, do your research to see if it has good long-term potential.
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About the author
Sean is a personal finance writer with a strong passion for helping others become more financially literate and make better financial decisions. He covers everything from credit cards to savings to investing.
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