Inflation the silent assassin of saving
Written by Paul Dodd on August 07, 2014.
Saving is good right? From an early age we are told to save for a rainy day and having something to fall back on in difficult times is reassuring. Savvy people also save in order to realise future plans, whether that be to cover future university fees, buy a sports car or travel the world. In these times when we can no longer rely on governments to support us during our retirement, increasing numbers of us are taking control of our own pension pots and investing for our twilight years.
But beware, there is a silent enemy at work that risks devaluing your savings and it goes by the name of inflation. Remember the good old days when you could buy a loaf of bread for 50 cents but now the same loaf will cost you $1.60. That’s inflation for you. Inflation is a rise in the general level of prices of goods and services in an economy over a period of time.
But it’s not just relevant to the past. The future value of your savings is under serious attack from inflation too, a fact often overlooked by savers. Published interest rates can look attractive (although these have taken a nosedive in the current financial climate), but it is easy to forget that there can be a big difference between the published interest rates and the real rate of interest. That difference is the rate of inflation. If you subtract the rate of inflation from the published interest rates, that is the real rate you are getting and it is quite possible for this to be negative. The unpalatable truth is that in real terms, you are losing money.
To take a very simple example: If you saved $100 at the beginning of the year at an interest rate of 2% and inflation for that year was 5%, your savings have effectively been reduced in value by $3.00. Scale this up for the possible thousands of dollars you have invested for your retirement and you can see how serious an enemy inflation is. During the years you save for your retirement, you could experience a significant loss in buying power which would leave you struggling through your latter years.
The good news is that there are certain safeguards you can take to beat this silent enemy. One imperative is to start saving as early as you possibly can in order to benefit from compound interest. By consistently reinvesting the interest and dividends on your savings, you can win the war on inflation.
A second weapon in the armoury for expats in Asia is the availability of tax efficient saving and investment opportunities which minimise taxation on the annual returns on your investments. Again, this will allow you to consistently reinvest higher amounts and benefit from compound interest.
A third tactic is to avoid putting all your savings in one basket. For many, the idea of investing in stocks, bonds, commodities or property is alien, but sticking your money in the bank is just not going to win you the battle. Instead you need to spread your investments over these different asset classes to create a balanced portfolio in which losses in some areas can be offset by gains in others.
To navigate your way through the financial landscape alone may seem daunting, which is why it is advisable to seek professional advice. A qualified financial adviser is invaluable to help you put together a personalised investment plan which will protect your savings and ensure that they are not eroded by the deadly foe of inflation.