Hello all, its Will Robinson the founder of Brentor Property Group.
Have you been paying attention to the financial news recently? Unless you have been living off grid, you have probably heard that inflation has been rising but what does this mean to you and me?
To start off let’s look at what is inflation and why it’s important for everyone to monitor?
In simple terms Inflation is when money loses value over time. It’s happening constantly – things are generally more expensive than they were a few years ago, but right now inflation rates are increasing.
To understand how it works, think about what you could buy with £1 over the past few decades.
We’ll look at it in terms of loaves of bread:
1970: £1 = 10 loaves of bread
1980: £1 = 3 loaves of bread
1990: £1 = 2 loaves of bread
2020: £1 = 1 loaf of bread
So, £1 can buy you much less now than it could in 1970 and in another ten years it will buy even less. This is due to inflation. This is known as the “purchasing power” of money.
To get a real understanding it’s important to know how the inflation rate is measured and what the inflation rate is at any given time.
The most used measures of inflation in the UK are the consumer prices index (CPI), the consumer prices housing index (CPIH) and the retail prices index (RPI).
Each measure is calculated slightly differently, although RPI is usually the highest.
While you don’t need to know how each measure is calculated, it’s useful to know the current rate. This is because different rates are used for different things.
What if I hear that inflation is high?
If you hear the inflation rate is high, that means you can buy less for the same amount of money, and this reduction in buying power is happening at a higher speed than usual.
Inflation is measured as a percentage:
If the inflation rate is 1% (lower inflation), the purchasing power of money will be 1% less a year later.
If the inflation rate is 5% (higher inflation), the purchasing power of money will be 5% less a year later.
What does high inflation mean for you?
It’s important to know the inflation rate when you’re thinking about savings and investments, since it makes a big difference to whether you make a profit in real terms (after inflation).
Say you put your money in a bank account, a good return at present from a bank account would be 0.5% interest a year. A year later you’ll have 0.5% more money in the bank.
But if inflation is more than 0.5%, then you will have a negative interest rate in real life terms. In that case, although you’ve got more money, that money can purchase less than the amount that you began with.
If your goal is to make money on your investment, you need to find an account or investment that ‘beats inflation’, which means the interest or profit you make is higher than the inflation rate.
The Consumer Prices Index (CPI) rose by 3.2% in the 12 months to August 2021, up from 2.0% to July. This is also the largest ever increase in the CPI 12-month inflation rate. The large change in the level of the index is likely to be a temporary effect.
Which means as a minimum you need to have your money making at least 3.2% interest a year just to be breaking even by this time next year.
So how do you protect yourself against inflation?
There are a few ways, some are better than others.
You could leave all your savings in a normal bank account but at the minute that would erode your money by a net amount of 2.7% a year at present.
You could go to a high interest saving account, cash ISA or similar, these are seeing between 1.5% and 2% interest a year, it’s getting better but still you lose money in real terms.
You could put your money into an index fund this would get you about 5% per annum, you are starting to make money, your savings are increasing now in real terms but only by 1.8%, you also must accept there are fees when you sell to get funds out so that 1.8% will in real terms be 1.5% after fees and inflation.
You could what we call a vanilla Buy to Let property, depending on where you are in the UK you would be looking at returns anywhere between 4% - 8% per annum realistically.
Alternatively you could talk to us, We offer bespoke handsfree investment opportunities to our clients. We offer low risk fixed returns on property that you don't need to own and also help our client make higher returns by either invest in Co-living properties (see our blog on Co-living for more details on this) or buy to lets, but using a BRR method of investing (for more details on BRR see our blog on BRR).
There’s no sure way to protect your money from the effects of inflation but the best way over the long term is to invest.
Whether you decide to speak to us or go alone, the only rule is that cash savings accounts are generally not the best places to put your money long term – the interest is almost always lower than inflation, so your money is eroding in real terms
Savings accounts still have their uses, especially for money that you’ll need to get your hands on soon. But if you’re planning to put money aside for five years or more, it might be better to invest in something with a higher return than the level of inflation.
If you would like to find out more about our inflation beating bespoke property backed investment solutions, email me info@brentorproperty.co.uk to discuss our bespoke investment opportunities.
For more information about us visit www.brentorproperty.co.uk
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