Inflation is one of the most important factors to consider when it comes to your savings and investments. Put simply, inflation refers to the rate at which prices increase over time, and as prices go up, the value of your money goes down. This means that if you’re not earning interest or investment returns that keep pace with inflation, your savings will lose value over time.
For example, let’s say you have £10,000 in savings earning 1% interest per year, and inflation is running at 2% per year. At the end of the year, your savings will have earned £100 in interest, but the cost of goods and services will have increased by 2%, meaning that your purchasing power has actually decreased.
To combat the effects of inflation, it’s important to make sure that your savings and investments are earning returns that at least keep pace with inflation. This might mean investing in stocks, bonds, or other assets that have historically provided higher returns over the long term.
However, it’s also important to balance the potential for higher returns with the risks involved, and to make sure that you have a diversified portfolio that can weather market fluctuations. Working with a financial advisor can help you navigate these complexities and create a financial plan that takes inflation into account.
