Inflation is killing your savings - what you must do to combat it

The American economist Milton Friedman once said: “Inflation is the one form of taxation that can be imposed without legislation.”

Yet for most people, it slips under the radar, affecting our spending power without us giving it a second thought. In recent years, inflation has made headlines more than usual, from the post-COVID stimulus surge to its gradual retreat.

I first raised concerns about the risk of rising inflation over three years ago. To me, it felt inevitable. Professional investors and economists should not have been caught off guard by its rise. What was surprising, however, was just how far and how fast it went.

Inflation is a normal part of the economy, and it shouldn’t be feared. However, when it gains momentum, it can spiral out of control, leading to a rapid increase in prices. This is what we have recently experienced, which led to the cost-of-living crisis that affected everyone.

Inflation and its impact on wealth is often overlooked. I tell my clients that inflation is one of the biggest risks to their money. Why? Because inflation is effectively a constant tax on the value of your pounds and assets, a tax that we all collectively pay.

Consider this: since 1989 inflation has averaged around 3%, which to most people would seem modest. But this means you would need to achieve at least a 3% return on your cash savings and investments, after tax and costs, each and every year, to maintain the value of your money.

In other words, you need £189 today to buy the same goods which would have cost you £100 at the turn of the millennium, just because of inflation.

That’s why I advise against keeping excessive amounts of money on deposit for prolonged periods of time. Inflation is like carbon monoxide to your money: it’s a silent killer of wealth creation, of which few people are aware.

So, what’s the solution? The answer lies in investing rather than maintaining cash deposits (savings). The MSCI World index, which is a collection of the world’s largest companies in developed countries, has delivered 10.5% pa average return over the last 20 years for UK investors. Even after accounting for fees and tax, you’ll comfortably stay ahead of inflation.

This is one reason why the wealthy get richer during inflationary times: they understand that companies can increase their prices and profits, which helps share values rise.

You too can participate and grow your wealth over the next 20 years, even if you start small, but you must start. Now, more than ever, it’s crucial to focus on the importance of investing to combat the negative effects of inflation. The recent high inflation rates serve as a stark reminder of this necessity.

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