investment tips Archives

Inflation vs. Your Savings

5 November, 202424 October, 2024 Updated on24 October, 2024 Economy, Finance, Investing

Inflation is a slow force working against your financial goals. It can quietly erode the purchasing power of your money over time. While it’s tempting to see cash as a safe haven, failing to factor in inflation could mean your savings are worth less when you need them most. So, let’s dive into the showdown between inflation and your savings, and explore strategies to fight back! Inflation’s Erosion of Cash Returns The Reserve Bank of Australia (RBA) defines inflation as “an increase in the level of prices of the goods and services that households typically buy”. When inflation goes up, the value of each dollar you own decreases, meaning you can buy less with the same amount of money. This becomes a real concern for investors who rely on cash or low-risk investments like term deposits, where returns may not keep up with inflation. For instance, if you’ve placed your money in a term deposit earning 5% interest, but inflation is running at 6%, you’re effectively losing 1% of purchasing power. This is what’s known as the real return – the return on your investment after adjusting for inflation. A return of 5% may look good on paper, but in real terms it means you’re going backwards. Long-Term Investment Strategies So, how can you prevent inflation from chipping away at your savings? One effective approach is to adopt a diversified investment strategy. Diversification involves spreading your investments across various asset classes such as shares, property, bonds, and international assets, rather than keeping all your money in cash or low-risk products. Equities, for example, have historically outpaced inflation over the long term. While shares can be volatile in the short run, their potential for higher returns helps them beat inflation over time. Property investments also have a history of delivering inflation-beating returns, as the value of real estate typically rises along with inflation. Exchange Traded Funds (ETF) may be a useful way to diversify your investments that are both simple and low-cost. A well-diversified portfolio ensures that you’re not overexposed to any one asset class. Instead, you benefit from the potential growth of various sectors, reducing your overall risk and improving your chances of keeping pace with or even outpacing inflation. Practical Advice for Investors Investing during inflationary times can feel overwhelming, but there are several steps you can take to safeguard your wealth: The Bottom Line Inflation can have a serious impact on the value of your savings, particularly if you rely on cash or low-risk investments. Over time, even a modest inflation rate can significantly reduce your purchasing power. By diversifying your investments, staying informed, and seeking professional advice, you can set yourself up to win in the showdown between inflation and your money. The information provided in this article is general in nature only and does not constitute personal financial advice. 

Building financial resilience

30 January, 20249 February, 2024 Updated on9 February, 2024 Budgeting, Education, Finance, Investing

Resilience is the ability to quickly recover from setbacks, and while setbacks can come in many forms most of them will have a financial component. So what can you do to build financial resilience? Expect the unexpected Rarely do we get advance warning that something bad is about to happen to us, so the time to develop your resilience strategy is now. And while we don’t know the specifics, we can anticipate events that would throw our finances into disarray. A house burning down or a car being stolen. Not being able to work due to illness or injury. The death of a breadwinner or caregiver. With some idea of the type of threat we face we may be able to insure against some of them. If you have taken out any type of insurance policy you’ve already made a start on your resilience plan. Create buffers You can’t insure against every possibility, but you can build financial buffers. This might simply be a savings account that you earmark as your emergency fund that you contribute to each payday. If your home loan offers a redraw facility you can also create a buffer by getting ahead on your mortgage repayments. Buffers can be particularly important for retirees drawing a pension from their super fund. Redeeming growth assets for cash in order to make pension payments during a market downturn can lead to a depletion of capital and reduction in how long the money will last. By maintaining a cash buffer of, say, two year’s worth of pension payments, redemptions of growth assets can be deferred, giving time for the market to recover. Cut costs The Internet abounds with tips on how to cut costs and save money. In difficult economic times cost cutting can help you maintain your financial buffers and important insurances. Key to cost cutting is tracking your income and expenditure and yes, that means doing a budget. Find the right budgeting app for you and this chore could actually be fun. Invest in quality There are many companies out there that have long track records of consistently pumping out profits and dividends. They may not be as exciting (i.e. volatile) as the latest techno fad stocks but when markets get the jitters these blue chip companies are more likely to maintain their value than the newcomers. This is important. The more volatile a portfolio the more likely an investor is to sell down into a declining market. This turns paper losses into real ones, depriving the investor the opportunity to ride the market back up again. The other key tool in creating resilient portfolios is diversification. Buying a range of investments both within and across the major asset classes is a fundamental strategy for managing portfolio volatility. With a well-diversified portfolio of quality assets there is less need to regularly buy and sell individual investments. Unnecessary trading can create ‘tax drag’ where the realisation of even a marginal capital gain triggers a capital gains tax event and consequent reduction in portfolio value. Take advice Building financial resilience can be a complicated process requiring an understanding of a range of issues that need to be balanced against one another and prioritised. Your financial planner is ideally placed to assist you in developing your own, personalised plan for financial resilience. The information provided in this article is general in nature only and does not constitute personal financial advice. 