By Kate Leaman, Chief Market Analyst at AvaTrade
In 2022, inflation in the UK had skyrocketed to 10.5 per cent, drastically affecting people’s finances and purchasing power. With the cost of goods and services rising, individuals were left with less money to spend on the things that matter most to them.
This meant that, in order to maintain their lifestyle, they had to reduce their spending on other things, such as leisure and entertainment. In addition to this, inflation erodes the value of savings over time. This means that people with savings were potentially losing out, as the value of their money was decreasing over time.
This is why it is important to try and stay ahead of inflation, by investing in assets that can grow with inflation, or by reviewing your income and expenditure regularly to ensure you are making the most of your money. Inflation affects us all, but it is possible to take steps to protect yourself from its consequences.
By understanding how inflation can cost you money and reviewing your finances regularly, you can ensure you are making the most of your money and minimising the impact inflation can have on your life. Here is how inflation can cost people money:
- The cost of living is rising
The cost of living is based on the expenses of goods and services that provide us with our basic needs. Last year, inflation accelerated at its quickest rate in 40 years. Despite a drop to 10.1 per cent in January from 10.5 per cent in December in 2022, inflation rose to 10.4 per cent in March, still making it difficult to afford the cost of living. This rise in inflation means that something which cost you £1.00 in 2022 now will cost you nearly £1.10.
- Savings are worth less
Inflation has a big impact on savings, due to interest rates on savings accounts generally being lower than inflation rates. This means that your savings are ultimately losing their real value and you can now buy less with your money. If inflation stands at five per cent and your savings account has an interest rate of four per cent, your savings are no longer retaining their value.
- You are paying more debt
Interest rates on debts on mortgages and loans are usually fixed and rarely remain at the same pace as inflation. This means as inflation rises, the real value of your payment reduces.
- Pension is worth less
The standard of living for those who are retired or those who are about to can be hugely impacted by inflation. Pensions are usually fixed and therefore are not keeping up with the rise in the cost of living. Ultimately, if pensions are not higher than inflation, you will afford less over time.
- You’re paying more for tax
Inflation impacts taxes as the tax bracket is not tailored to inflation rates. As costs increase, so too do taxes. Though incomes can rise, the taxes will rise with it and ultimately, the real value of the income remains the same.
Now that some of the ways in which inflation is costing you money have been highlighted, here is a list of ways you can protect yourself from it in 2023:
- Trade shares online
Trading shares online is an efficient way to protect yourself against inflation. This is because the prices of shares are usually linked to inflation meaning as inflation rises, the value of shares can rise with it.
- Invest in property
The rental income from a property is usually tied to inflation, which means as inflation rises so do property prices. Ultimately, by investing in property, you are protecting yourself from inflation. Tracking homebuilder stocks will help in keeping you updated regarding what’s happening on the property market.
- Invest in bonds
Bonds are a debt where the issuer, a government entity or corporation, pays the lender principal and interest on a loan on a future date. There are three types of corporate bonds, and they are an investment used to provide protection against inflation. The interest payments on bonds are frequently linked to inflation so as inflation rises, the value of your bonds rises too.
- Invest in diversified ways
Whether this is investing in bonds, stocks, cash equivalents, or real assets, diversifying your savings can protect you from inflation. This is because if during inflation one of your investments loses its value, your other investments may still retain their value.
- Plan ahead
Having an existing plan in place to prepare for the impacts of inflation can be vital. This can be having a trading plan such as trading consumer discretionary stocks. Consumer discretionary stocks make money from a wide range of consumer goods and services, and they are inflation-proof.
Being aware of inflation’s effects is essential in order to keep costs at bay. By understanding the various ways it can cause prices to rise, individuals can take steps to avoid the associated financial burden. From staying up-to-date with current market trends to budgeting for higher costs, there are a number of strategies that can be used to mitigate the impact of inflation. Taking the time to learn more about how inflation works and how it can affect one’s finances is a great way to ensure that one’s hard-earned money is not wasted.
