Learn to Invest with Methodology

5 Ways to Protect Your Savings Against Inflation


by Jon Rowe

Rising inflation is increasingly a concern for people all over the world. Caused by a combination of the war in Ukraine, the pandemic and Brexit, levels of inflation in the UK rose to a 40-year high of 9.1% earlier this week.


While levels of inflation sky-rocket, most of the discussion to date has surrounded the concerns that people have about their income not keeping pace with inflation.


Of course, this is a very important consideration, especially when the cost of living has risen to an unlivable point for many.


However, little attention has been given to the value of people’s savings and what they can do to protect their savings from the impact of inflation. In the long term, if savings fail to keep up with inflation, it can have a significant impact on the financial well-being of an individual.


Take South Korea as an example, where most of the people living in poverty are the elderly population. This happened because the economy grew dramatically across the last 50 years, leading to periods of high inflation. Many in the elderly population did not manage their money with inflation in mind, resulting in their savings becoming less valuable over the long term.


Considering the seriousness of inflation and the impact it can have on an individual’s long-term financial wellbeing, this article will outline five ways that you can protect your savings from inflation. 

1. Gold


Traditionally, investing in gold is seen as a good investment during periods of high inflation.  The returns that an individual can achieve on gold are thought to be negatively correlated with that of stocks – so when the stock market falls, as it does when inflation is high, gold is thought to have a positive effect on the price of gold. This happens because inflation reduces the purchasing power of a currency, which results in the increased price of gold.


2. Inflation-linked bonds


A bond is a financial instrument that allows you to lend your money to an organisation. Just like when you take out a loan, when you purchase a bond and lend your money to an organisation, that organisation must pay interest to you. An inflation-linked bond is a bond that pays a return that is the same as the inflation rate. This means that if you invest in such bonds, your savings will be protected against inflation. Inflation-linked bonds are primarily offered by governments. 

3. inflation-linked investment funds


If you are not exactly sure how to purchase bonds on your own, another way to gain exposure to inflation-linked bonds is to invest in an investment fund that holds them. Inflation-linked investment funds will protect your savings against inflation and are usually run by companies like Vanguard or BlackRock. Such funds can easily be found on the platforms of reputable brokerage firms, such as AJ Bell or Hargreaves Lansdown.


4. Real Estate


If you are lucky enough to have enough money in savings to invest in real estate, it could be a good option to deal with rising inflation. This is because rental payments can be increased to achieve a return that meets the inflation rate. In addition, the demand for real estate is high nowadays, so the value of a property is likely to exceed inflation, especially in the long term. To invest in real estate you could simply buy a house, although another viable option would be to invest in an investment fund that manages properties – these are known as REITs (Real Estate Investment Trusts).


5. Equities


Finally, another way to overcome the inflationary pressures is to invest in equities, especially for the long term. Equities, also known as stocks, are financial securities that represent ownership in a particular company. If held for the long term, stocks can far outpace inflation. This is especially true when investing in companies that can easily increase their prices to match the inflation rate. For many new investors, it may be more appropriate to invest in an index fund, such as the S&P 500, which is an investment fund that holds a large number of equities.

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