Do You Need To Protect Your Savings Against Inflation?

Do you need to protect your savings against inflation?

The short answer is yes. The United Kingdom is currently facing inflation of 3.2%, with the Bank of England’s base rate being at 0.1%. The value of cash savings throughout the nation has eroded by 3.1% in the last financial year. The inflation rate for the year 2022 is predicted to increase sharply and peak at 4.6%. With the ever-increasing rising inflation and the falling value of money, it only becomes essential to protect your savings and their value as much as possible. 

How does inflation act as a threat to your savings?

Inflation can have a drastic impact on the value of your cash value. This means, the more you keep your cash laying around as the years pass by, the more value it loses. Let us consider an example. If you have 1,000 euros as cash in your bank account for the last ten years, the real value for these 1,000 euros would be somewhere around 880 euros. This results in a loss of over 10% due to inflation outstripping the interest rates provided by the Bank of England.

Can you beat inflation with your savings?

All the cash you have, either in your pocket or in the bank, will witness some erosion due to inflation. However, there are some things you can have in place in order to protect your hard-earned money against inflation.

If you decide to invest the same amount of 1,000 euros that you had deposited in your bank in a diversified portfolio instead, over the same period (last ten years), it will reap you almost a 60% overall gain, depending on the type of stocks you invest in. this means, if you had invested 1,000 euros in a diversified portfolio with a decent risk-return ratio, you would get 1,590 euros in return., 

This means that investing in a diversified portfolio is a better alternative that gives better returns over the last decade when compared to cash, protecting your savings and wealth from inflation and also providing you with some real gains. 

With the interest rates hitting an all-time low and inflation rising continuously, it only highlights that the cash savers might not consider other ways to protect their wealth against inflation than to depend on depositing money into the banks and letting it sit around. 

Some other ways to protect your savings against inflation by converting your cash into an asset 

Gold

When you convert your savings into an asset like gold, you are sure to protect your savings against inflation to a decent level since gold prices have only tended to increase over the years and will continue to do so in the future. Gold is one of the best hedges against inflation and can also be used as an alternative liquid currency due to its ease of conversion into real cash. 

Commodities

As we have discussed earlier, diversifying your portfolio is the key to protecting your savings against inflation. And, commodities offer you a broad range of products, including metals, grains, oil, electricity, natural gas and more, that have a unique relationship with inflation. Whenever your country witnesses inflation, the commodity prices are the first to go up, and so are the prices of the related products., hence, when you have invested your money into such commodities, there is less to worry about when the overall price in the economy skyrockets. 

Foreign exchange

The foreign exchange market is one of the biggest and most popular financial markets worldwide. In this, you can trade several currencies belonging to different countries. Investing your savings in this market, you can rest assured that your wealth will be protected against inflation, provided no global crisis comes your way.

Real estate investment trust

A real estate investment trust or REIT is a company that owns and operates income-producing real estate. They own commercial real estate, including shopping centres, offices, apartment buildings, hospitals, warehouses, hotels, and more. Whenever a country faces inflation, the real estate prices are one of the first to shoot up, so it is always advisable to have some of your savings invested in such a real estate investment trust. The company pays dividends to all its investors, guaranteeing a constant source of passive income.

Conclusion

It is possible to lose out on your saving’s value due to inflation. It impacts the worth of your cash, decreasing its value over time as the prices of goods and services keep on increasing. Hence, every time the goods and services become more expensive, you can only buy less of the same goods and services as you could earlier. So, it is best to have ways in which you can protect your savings against inflation and ensure that your cash does not lose its value over time.

 

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