This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
The UK’s inflation surge in 2022 is persisting, despite efforts by the Bank of England (BoE) to bring it down to more “normal” levels (closer to 2%). Presently, inflation stands at 9.4% and could reach 10% or more by the end of the year. This is bad news for households, since the higher inflation goes, the less “buying power” your money has. If a £1 supermarket item rises by 10% over 12 months, for instance, then it will cost you £1.10 to buy it next year.
You cannot do anything to stop inflation. This is in the hands of governing bodies and global economic forces. However, what steps can you take to mitigate its harmful effects on your wealth? Our team at Elmfield Financial Planning in Padiham, Burnley offers some answers. We hope this is useful and please get in touch if you’d like to discuss your own financial plan with us over a free, no-commitment consultation.
Get the best interest rates
When inflation rises, central banks like the BoE tend to respond by raising interest rates to slow down consumer spending (since better savings rates are on offer from bank accounts). This has happened multiple times since December 2021, with the base rate going up from 0.10% to 1.25% at the time of writing. This could even rise to 2.5% by the end of 2022.
High street banks, traditionally, raise their own rates when the base rate goes up. This means that savers can access better rates. In August 2022, it is possible to earn up to 5% on a regular savings account or 3.5% fixed. If your cash is still sitting in an account with a low interest rate, therefore, then you may benefit from shopping around.
However, be careful not to hold too much wealth in cash. This is because the interest rate even on the best accounts will not beat inflation in 2022, meaning your cash will lose value in real terms. As a general rule, keep 3-6 months’ worth of living costs in easy-access savings in case of emergencies.
Another thing to consider is your mortgage. When the base rate rises, it is not just savings rates that banks are likely to push up. The interest rates on new mortgage deals also go up. At the time of writing, you can find fixed mortgage deals as low as 2.89%. This is in contrast to the sub-1% deals that could be found in January 2022 (now pulled from the market).
For most households, the monthly mortgage payment is likely to be the biggest expense. With interest rates going up, therefore, take care to find the best deal for you. If you are already on a long-term fixed deal with a competitive rate (compared to current deals), consider keeping it. If you are on a standard variable rate (SVR), which may go up if the BoE keeps pushing up the base rate, then consider getting a fixed deal.
Re-deploy long term savings
With cash savings, you are guaranteed a real-terms loss (due to inflation beating your interest rate). With long-term savings, therefore, it can help protect your wealth to re-deploy these to other assets and investments with higher growth potential with a better chance of beating high inflation – such as equities and bonds.
Index-linked bonds (gilts), for instance, are offered by the UK government and are considered very “safe” investments because the UK government has never defaulted. Currently, the UK Gilt 10 Year Yield offers a 4.25% coupon (the “interest rate” offered to investors). Whilst this does not beat the present 9.4% rate of CPI inflation, it could be a good option if inflation starts to come down in 2023 as expected.
Equities also offers a powerful route to inflation-matching (or inflation-beating) investing over the long term. The S&P 500, for instance, is one of the leading indices in the US and has offered a 10.5% average annual return between 1957 and 2021. However, investing in equities carries more risk than bonds, particularly in the short term when market volatility can occur. Equities are also not guaranteed to beat inflation in 2022, with the possibility of recession presently hanging over markets.
Here, investors need to take a long-term view with their equities and follow time-honoured investment principles – such as remaining appropriately diversified (i.e. spreading out investments across different markets, companies and sectors). A financial planner can help you build a suitable portfolio for your needs and goals, also reviewing it over time to help keep you on track towards wealth growth and preservation.
Ensuring maximum tax-efficiency for your investments will also help your efforts to counteract inflation’s eroding effects. Using “vehicles” such as ISAs and pensions can be good options to consider with a seasoned professional.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
