Cactus Personal Finance

In this article I’m going to share my personal experience to someone completely new and hopefully you’ll have a better idea after reading this article.

This is not financial advice, I encourage you to do your own research. If in any doubt, it’s probably worth seeking advice from a regulated financial advisor.

In the investment world, inflation is often called retail price index or consumer price index; it comes as a percentage.

By price I’m thinking about food, petrol, transport, clothes, furniture, rent and so on.

1. Cash and spending power

Let’s take a practical example. You’ve decided to purchase a nice sofa for your living room and your budget is £500. You walk in a furniture store. Hourra! You’ve spotted a sofa you like and it goes for £500. You decide not to purchase it today and come back in 6 month time.

Back in store with the same budget and the sofa costs £510 now. As you’ve noticed, your budget stayed the same but the sofa price increased.

It means your spending power has eroded because you need to add more money to purchase the same sofa.

In the next section I’d like to talk about different ways to make your money works for you.

2. Savings

Saving accounts are a great way to grow your money and protect your spending power.

It means your money kept in a saving account grows as fast as everyday life prices.

Saving account rates are as high as inflation rate, at least.

If your saving account shows an interest rate of 4% and the inflation rate is 4%, it means your money is growing as fast as inflation, and that’s great news.

3. Investments

If you’re lucky enough to have money invested in the stock markets, it might be worth paying attention to inflation to understand how it could affect your money.

Let’s take another practical example. The Bank of England shows a 2% inflation rate on its website. What does it mean for your investments? Like savings accounts, the same applies to your investment accounts. If you think about your spending power when you want your money back in future, you need to invest your money somewhere that beat the inflation rate.

When it comes to investing, funds and ETF are a great way to make your money grow as fast as the inflation rate, at least.

When it comes to investing in the stock markets, inflation is important to consider. If you invest in the stock markets for 10 years, it means that the inflation rate will have reached 20%.

In other words, the stock markets has to grow more than 20% in the next 10 years to make a real return on your investments when you get your money back.

I hope you enjoyed reading this article. That’s it for today.

Feel free to drop me a line to discuss the topic.

Cheers