Here’s the thing about personal finance. There appear to be no absolutes. What might work for one person is an anathema to another. What seems risky might end up smart. What seems absolutely concrete- like savings in the bank- might have drawbacks, as inflation eats away from the profits. But is there any way to inflation proof your savings and avoid losing money?
The Long And Short Of It
According to British figures, the average taxpayer with 10,000 pounds in the bank will make small inroads with interest, but end up at a net loss of 384 pounds per annum. There are a lot of things you’d prefer to be doing with your 384 pounds I’m sure.
With inflation and the consumer price index heading upwards, it tends to do less-than-positive things to your net worth. There are those that argue that shares and bonds are better able to return on an investment and ride out inflation, but that involves higher risk and still involves the potential of losing money.
Emma Simon suggests looking for savings accounts where returns are tied to inflation- though she warns of the downside to that strategy should inflation drop over the course of the savings period. Similarly, there are accounts where interest is paid tax-free, allowing savers to beat inflation with their returns.
Those kind of savings accounts are few and far between, and consumers should thoroughly investigate the ins and outs of the contract before signing up.
As always, high returns spells a certain amount of risk. Before committing to anything higher risk than your current scheme, ensure that you talk to a professional about how best to approach it and what safety guards are in place. There is a scheme called Zopa, facilitated online, where you become a lender. Your investment is shared among 50 borrowers so one default doesn’t set the whole thing on fire- it’s aimed as an opportunity for people to obtain cheaper loans and allow lenders to make money.
According to the company, they’ve had only 0.7% default rate and the average return in 2010 was 7.8%, definitely higher than inflation. I’d take it all with a grain of salt however, and definitely consult someone before putting in your life savings.
When dividends are taken into account, shares can end up at inflation-beating returns. According to personal finance experts, the key is to diversify, to discuss what are good options for investment widely and with people in the know, and to invest in what’s causing the inflation in the first place- i.e. energy and food-related shares. After all, they’re only going to go up.
As mentioned above, a leading cause of rising inflation is the cost of metals and food. So why not look at investing in them? Naturally, prices are already high. Another stalwart of inflation hedging is gold, either directly (buying it, storing it somewhere, putting in a swimming pool and glorying in it) or investing in it through an equity fund. This invests in the mining companies and other beneficiaries of rising gold and commodity prices.
The people to party with it would seem, although- as always- it’s imperative to thoroughly analyse their offers, evaluate the risk and not over-expose yourself. Losing three hundred pounds a year still remains preferable to losing the lot.