If you haven’t heard the latest about the interest rates in the UK, where have you been?
The Bank of England has slashed their base rate from 0.5% to 0.25%. 0.25% is a new low interest rate for the UK and is aimed to help stimulate the economy after Brexit.
So what is inflation?
Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.
When the price level rises your money buys fewer goods and services.
Consequently, inflation reflects a reduction in the purchasing power – a loss of real value of your money.Essentially, you want your savings rates and your investments to match and beat inflation - hence preserving your wealth.
If you are earning less than the increase in inflation, you are losing the real value of your wealth. Without any action in preserving your wealth you’ve obtained today
then tomorrow’s wealth will be less.
The current inflation rate of the UK is 0.5% with the Bank of England targeting 2%.
After Brexit, in the Bank of England’s latest Inflation Report, they state:
The fall in sterling is likely to push up on CPI inflation in the near term, hastening its return to the 2% target and probably causing it to rise above the target in the latter part of the MPC’s forecast period, before the exchange rate effect dissipates thereafter.
(Source: Bank of England Inflation Report – August 2016)
With current conditions, inflation is on the rise:
So – if you have savings; if you are earning less than 0.5% per year on these savings; you are losing the real value of your money!
If your saving rates are at 0.5% or higher then you are keeping at pace with inflation or beating it.
Soon, rates offered on savings and current accounts from banks may go lower after the Bank of England’s base rate cut to 0.25%, which means it would be a good idea to start looking for alternatives to preserve wealth and the real value of your monies.
To put things into perspective:
If you were earning 0.25% on your savings account and inflation is at 0.5%, your wealth would be eroding -0.25% a year if you did nothing with it.
So where do you look to beat inflation?
There are other alternatives such as real-estate and the stock markets. Although be it involving risk.
However, with low rates and higher inflation – your money will be eroding away like in the example above.
People have been using the stock market to help grow their wealth.
The stock market requires you to take a more pro-active approach compared with money sitting in your bank account gaining interest.
It also, of course, involves risk.
However, you can invest not only to increase your capital but to also receive income through company dividends.
Some investors only invest for capital growth.
Some investors only invest for income, receiving company dividends straight into cash.
When you have a sizeable portfolio, dividends from companies could provide a secondary income.
You can invest in the stock market in two ways, either by yourself or through a professional service like a stockbroker or an investment management service.
As an investor your goal is to not only invest in inflation beating investments but to also outperform inflation to reward the risk of the stock market.
With more information available online about investment options, it’s never been easier to find out which deals might suit your needs best.
Whether you are an experienced investor or an absolute beginner, it makes sense to consider all the choices available to you.
The above is not considered financial advice or any endorsement to use any particular service. If you wish to use any of the services mentioned, please seek independent advice.