Inflation devalues the purchasing power of your money. How will inflation impact the value of your savings, particularly if you’re still being highly conservative and holding a large portion of your portfolio in cash waiting for the economy to ‘get back on track’?
A good place to start is by looking back at how inflation has affected the cost of living in Australia. The Reserve Bank of Australia (RBA) has a handy calculator on its website (www.rba.gov.au) that tells us how the cost of a ‘basket of goods and services’ has changed over a chosen timeframe. It’s a great eye-opener.
According to the RBA inflation calculator, one hundred dollars worth of goods purchased in 1980 cost $440 in 2020! One hundred dollars spent in 2000 cost $162.43 in 2020. That may not seem much BUT when you realise that the increase over that time was 62.4% you might be a bit more concerned. Over the 20 years, this averages out to just 2.5% per year, which is within the RBA’s target range. But, how could this impact your savings in the current economy?
During periods of high inflation, which we are currently experiencing, the purchasing power of money held in cash reduces faster. With most term deposits currently earning less than 3% pa interest, apply the current inflation rate of just over 6% to this and you’ll realise that these accounts are not earning any real returns; in fact, most are losing value. This is why it’s so important to be vigilant about how inflation may affect your super in the lead-up to and during your retirement.
Every investment must meet your own individual needs, now and in the future. If you would like to learn more about how to manage the impact of inflation on your savings or your retirement, speak to us. We may not have a crystal ball, but we do have a good understanding of how all this works!
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