Slaying the Inflation Dragon
Inflation may be stirring again. Long term financial planning can help you to understand the threat and fight back against this real wealth destroyer.
There has been a lot of talk over the past 12 months about our fight against a biological invisible enemy. Our work in financial planning has long been centred around another economic invisible enemy: inflation.
I was reminded of this when I treated myself this week to a drive-through coffee for which I was charged £2.80. I had become accustomed to a price of £2.40 last year. Costa have now decided to pocket the VAT reduction granted by the Chancellor and, let’s be honest, who can blame them? They have endured 12 months of disruption to their carefully crafted business model and their stores, expensively designed to hum with friendly communal chatter, are now just hollowed out shells.
As we hopefully edge back towards something like normality in 2021, demand for everything we have missed will be high, we will have saved some additional money thanks to lockdown and the businesses that have survived will be desperate to repair the very large holes in their finances. We should also allow for the vast sums of money governments around the world have been borrowing and spending to fight the effects of Covid which, according to most economic textbooks, should have some serious inflationary consequences.
Canary in the coalmine
It might therefore be that my humble flat white is a canary in the coalmine that we should be prepared for inflation, the invisible enemy of real wealth creation, to be stirring from its recent slumbers.
Annual UK Consumer Price Index change (%)
The insidious impact of Inflation
The impact of inflation is insidious as its seemingly innocuous short term impact compounds every year. What cost you £100 in 2000 would now require £175 to buy the equivalent in 2020 – (try the calculator at https://inflation.iamkate.com).
The fundamental challenge in financial planning is not preserving capital but preserving purchasing power. It’s no good having a wheelbarrow full of cash if it only buys you a loaf of bread.
Working with a financial plan that extends decades into the future, allows us to see the results of the mathematical battle that rages between investment returns and inflation, as your money fights to preserve its purchasing power.
Ensuring you preserve your purchasing power
A financial plan allows us to simulate the long-term effect that inflation can have on your real wealth and ensure that, as an absolute minimum, your investment strategy preserves the purchasing power you have today.
Many people have natural biases and behaviours with money that make it very difficult for them to live with the investment risk that is required to at least keep pace with inflation, especially if the inflation rate is rising.
Working together with a financial plan is a great way to understand and balance the risks of investing in volatile assets against not having an investment return that protects you from the fire-breathing dragon that is inflation.
Get in Touch
We offer potential clients an initial meeting at our expense, so you can decide if our service is right for you.
Arrange your meeting with one of our financial planners, to get expert advice.