Investing to Beat Inflation: How Does It Work?

When it comes to effectively managing your finances, it’s essential to understand the impact of inflation on the economy and in your future financial planning. Some people don’t even know the importance of investing to beat inflation.

Inflation, which is a measure of the pace at which prices rise, can directly impact the success of your financial goals. If you are earning a salary, but inflation is rising, you may be able to purchase fewer goods and services than you would have been able to one or two years ago.

What Exactly is Inflation? 

Inflation is a general increase in the overall price and cost of goods and services consumers purchase. It is usually expressed as an annual percentage. The Consumer Price Index (CPI) is one of the leading indicators of inflation.

It measures the price of a market basket of goods and services purchased by the average household. This index is calculated every month, and a change in the index from one month to the next is referred to as the “month-over-month” change.

Over the past twelve months to the March 2022 quarter, the CPI rose 5.1% which is higher than average and makes the costs of purchasing goods and services more expensive.

The Average Goal of Inflation of the Reserve Bank of Australia

The Reserve Bank of Australia (RBA) has an inflation target of 2 per cent. This means that the RBA aims to keep the average CPI inflation rate in the range of 2-3 per cent. The RBA believes that this inflation level is consistent with the economy achieving the most significant level of employment and economic growth over time.

How Inflation Impacts Your Goals

If you are earning a salary, but inflation is rising, you may be able to purchase fewer goods and services than you would have been able to one or two years ago; and if you are not keeping up with the inflation rate, your purchasing power has deteriorated.

Inflation can also impact your savings. If you have a low interest-earning account and your inflation rate is higher than the interest you are earning, you may be losing money in real terms. This is because even though you are earning interest, the actual purchasing power of money will decrease.

If you have a high-interest savings account, you need to watch the interest rate changes. In some cases, interest rates have gone up during periods of inflation, which has eroded the buying power of your savings.

The way you invest your money should be dynamic, and you should make adjustments to your investment portfolio accordingly. This may include shifting part of your portfolio from lower-return assets such as cash or bonds to riskier, higher-return assets such as managed funds and share if your inflation rate is higher than the interest rate you are earning. Remember to seek advice from a qualified financial adviser before changing your portfolio’s investment mix.

Investing to Beat Inflation is the Key! 

One of the reasons you should diversify your investment portfolio is that you want to protect your savings from inflation. Remember, you can’t beat inflation by buying and holding a single bond.

Your investments need to be diverse and able to grow in a variety of economic environments, including periods of inflation. An investment portfolio should not just contain cash and bonds, but it should also comprise other assets such as currency hedging products and shares.

The good news is that you don’t necessarily have to lose money in periods of inflation, and you can take advantage of inflation to increase the growth of your investments. Inflation can significantly impact your financial planning, so it is vital to know the different ways you can use investments to beat inflation and protect your money.

How Can We Help You?

If you’re concerned about your portfolio and are looking for a financial planner in Byron Bay, Ballina or the Northern Rivers, Coastal Advice Ballina Byron is the best fit for you! With years of experience, our team is the trusted adviser for Ballina, Byron Bay and the Northern Rivers. If you’d like to start planning for retirement, give us a call!