If you have savings in an interest-earning bank account, chances are you’ll be earning around 1.8% interest per annum – way below the rate of inflation. If you’re using term deposits, you’ll probably be earning between 3 and 4% per annum, which still isn’t keeping up with inflation.
The worst-case scenario is having a substantial balance in an account that’s earning no interest at all. Typically these are everyday bank accounts that are designed for day-to-day transactions. Sometimes money can build up in these accounts, which is a missed opportunity to earn interest.
A calculation that shows how inflation can erode your savings
Crunching some numbers can provide further insight into the damage inflation can do to your nest egg.
Here’s the calculation investors use to work out how long it will take for them to double their money at a certain interest rate: You divide 72 by the annual interest rate you’re earning. So if your money is earning 3% a year, it will take 24 years to double.
The same sort of calculation can be used for inflation, except it’s reversed. To work out how quickly inflation will halve the value of money you’ve saved (assuming it’s not earning interest), divide 72 by the annual inflation rate. With NZ’s current inflation rate at around 7%, it will take about 10 years to halve the value of your savings.
The key to investing during high inflation
During inflationary times, experienced investment advisers focus on helping their clients invest in the assets that fare best under inflation. In other words, investments that will bring in more cash or rise in value as inflation increases. The best investments during high inflation typically include things like:
Tangible assets, such as real estate, precious metals and commodities, which have a track record of continuing to perform when inflation is high.
Specialised securities, including shares in certain sectors, inflation-indexed bonds and securitised debt.
Everything points to getting good investment advice
Common sense says that now is not the time for experimentation with an online share platform. While it can feel like fun to buy and sell shares, in the hope of creating an inflation-proof reserve of cash, you’re effectively gambling with your savings if you don’t have a robust investment strategy driving your decision-making.
A smarter approach is to build a strong investment portfolio through Apex Advice. Our people are qualified financial advisers who can help you with strategy and implementation for inflation-proof savings.