Currently, the inflation rate for the UK is sitting at 4.2%, as of October 2021. Interest rates however are still low so finding savings accounts with decent interest rates that allow your money to grow could be quite difficult and securing a rate above the rate of inflation would be nearly impossible.
This does not constitute advice and advice should be sought in all instances before acting on it.
If the cost of living rises faster than your savings are growing, your money is losing its value. Sure, having a cash fund saved for emergencies is a smart plan, but it’s not wise to rely on that for long-term saving or investing because inflation will quickly deteriorate its worth.
Well-managed investments, on the other hand, normally grow by more than cash. Even if inflation isn’t always a worry as it is right now, it should still factor into your investing strategy.
Here are a few ways to beat inflation
Investing over inflation
The nature of investing is that change happens constantly and while there are no guarantees, in general, we can deduce that the most volatile investments tend to increase over time, while those that don’t experience frequent change don’t usually grow much in the long run. So if you’re comfortable and trust in your investment choices, even some of the higher-risk ones, to perform well, then you can stick it out and beat inflation this way.
If the idea of high-risk investments puts you on edge, you might target ones that provide just enough growth to beat inflation but don’t carry the risk you’re uncomfortable with.
No matter what kind of investments you make, there is always a risk of losing money, so you need to ensure you have a diverse portfolio and short-term savings for smaller goals and in case of emergency.
Staying ahead of inflation
One way to stay ahead of inflation is with stocks that pay good dividends because they offer a tangible return and can keep up with inflation. Dividends are also calculated annually, similarly to inflation, and is called the dividend yield. The dividend yield can be calculated by adding dividends received during the year and dividing it by the stock price. The result must be higher than the annual inflation rate. Having dividends will ensure your portfolio is stable and less vulnerable to volatility and inflation.
Tax-efficient investments
It’s a fact of life that the more money you make, the more tax you are subject to, so it’s important to protect your investment returns from tax as much as you can. Individual Savings Accounts (ISAs) and pensions are two great ways to do this. With ISAs, you can invest up to £20,000 a year (tax year 2020/21), which can provide a tax-efficient return through interest, capital gains, and dividend income. Even though you can’t access your pension money until you reach the age of 55, pensions offer the same benefits, and tax relief on your contributions up to a maximum of £40,000 a year (or 100% of your salary if it is less than £40,000).
Inflation-proof your portfolio
With inflation high at the moment and the future uncertain, it’s important to create a strong portfolio that is not only aligned with your goals but also contains the right inflation-beating investments. To discuss your options for an inflation-proof portfolio, please contact us today.
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