Ask An Adviser - How Can I Safeguard Savings From Inflation? (1)

Top answer provided by:

Ryan Scherini

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Hi Amara,

Thanks for reaching out to Adviser Ratings with your question.

It’s very topical right now with higher costs of living, lower wage growth and most economists are forecasting that this is going to be our new normal for at least 12-24 months. The Reserve Bank of Australia (RBA) target a long-term inflation rate of between 2-3%. Currently, our inflation rate for the past 12 months (as of September) was 5.40%.

I understand your concern around the deterioration of your savings. This is ultimately why the RBA has had to lift interest rates so drastically over the past 12 months and will potentially lift rates again in the short term – especially whilst inflation remains higher than the target benchmark. Inflation is a silent killer of economies and personal finances.

Typically, inflation is managed on two fronts, by the Government (Fiscal Policy) and by the RBA or equivalent central bank in each country (Monetary Policy). However, in more recent times it has largely been the RBA in Australia doing the heavy lifting when it comes to managing inflation in Australia. Essentially, these two groups in times of high inflation should be looking to contract spending in the nation. At the Government’s discretion (Fiscal), might be around increasing taxes or decreasing their own spending and the RBA will manipulate the money markets by changing the headline interest rates or cash available in the economy.

Now, that I’ve tried to cover the background, where does this leave you Amara? Currently in Australia, savings in the bank is essentially going backwards. What I mean by this is that most high interest savings accounts are paying above 4% (some in the 5’s with intro offers). Whilst CPI is higher than the savings rate, the purchasing power of your money is deteriorating year on year. So why do we save if it’s only going backwards?

Firstly, this is coming down in most situations to individuals’ tolerance to risk. Generally, our threshold for pain is much higher than gains when it comes to financial markets. We feel it more when we lose compared to when we make money. There are plenty of charts to support long-term investing and avoiding the short-term noise on financial volatility. However, in practice, we’re humans and we worry about things.

Secondly, which folds into risk tolerance is timeframe. I’m not sure what your savings are for (i.e. house deposit, holiday, rainy day etc.). However, if you have a longer timeframe and you could invest these funds. Over the longer term, equity markets do generally outperform cash savings. Although, you will have more volatility over the journey.

Lastly, on risk profiling, would be diversification. Whilst I’m not sure exactly where all your assets are held. Similar to the previous two points, if you own everything in cash, this may not be the best approach to achieving your longer-term goals.

Typically, when I’m giving advice to a client, I take all these things into consideration before giving advice. The advice process involves understanding your objectives, what are both your short- and long-term goals. We would look at when you need to potentially access capital, where is the best place to invest for both estate planning and tax purposes. As already mentioned, what are then the best investment options based on the risk you’re prepared to take.

Whilst nobody has a crystal ball, everything we’re hearing now Amara is that it might be a difficult 6-12 months from an economic point of view. I think most of us are starting to feel the ‘bite’ of interest rates and the increase in the cost of goods. Coupled, with the fact that most of the population haven’t been getting pay increases in line with inflation. Post COVID, our savings rate as a nation has significantly decreased which all points to harder times ahead.

I’d suggest, if you haven’t already, seeking the advice of a financial planner in your area. As mentioned previously, they can provide a holistic plan to help meet your objectives both short and long term.

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

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