Many savers are burying their heads in the sand as they are confused by what’s happening within the financial market and global economy. Inflation rates are high, bank interest rates are low, government bonds no longer seem safe and the stock market is too volatile, so what should you do with your money?
Keep it under the pillow? Unfortunately the pillow is not the answer, but it’s a fact that every day you delay making a sound financial plan your money is being eroded by inflation.
How is inflation measured?
The Consumer Prices Index (CPI) and the Retail Prices Index (RPI) are the two main measures of consumer inflation. The Producer Price Index (PPI) measures the price changes of goods bought and sold by manufacturers. The Services Producer Price Index (SPPI) measures the price changes of services provided by businesses to other businesses and government.
What are the current inflation rates?
The inflation rate in Portugal was last reported at 2.9 percent in August of 2011. From 2002 until 2010, the average inflation rate in Portugal was 2.25 percent reaching an historical high of 4.20 percent in February of 2003 and a record low of -1.60 percent in June of 2009. The Eurozone inflation has picked up recently to 2.5% above the target of 2%. The United Kingdom also continues to feel the pressure and inflation in August was at 4.4%, well above the 2% target. This is felt more by the expatriate market here in Portugal as many of our home comforts like your favourite meats, pies or Yorkshire puddings maybe imported from the UK or other countries with higher inflation rates or even a strong currency, both further impacting your wallet.
When will Bank rates rise again?
The ECB, which has raised its benchmark rate twice this year to 1.5 percent to tackle inflation, has recently been forced to start buying Italian and Spanish bonds to stop the region’s sovereign- debt crisis from spreading, so no further rise is expected in 2011. Whilst in the UK for the 30th month in a row the Bank of England has held the base rate at 0.5%, and economists predict the first interest rate rise won't be until at least 2013. So the UK seems as if it’s now heading into a Japanese-style era of ultra-low rates to combat a depressed economy.
What does this all actually mean to your savings and your future?
It’s a known fact that we are living longer, on average Men aged 65 can expect to live for another 22 years and Women another 24 years. It’s nice to think that you have the potential for a long retirement. You will no longer have the routine of going to work and every day can be taken at your leisure. However, if you don’t save enough or ensure your money is protected against inflation, your retirement may not be the one you wished for!
Below is an example of the effects of inflation on everyday goods:
So what’s the answer?
Leaving your money in the bank hoping for a quick turnaround in interest rates may be just as big a risk than investing your money into an alternative equity based investment. There may be more perceived risk, but a change in your attitude to risk maybe required in order to yield a higher return and protect your capital against inflation. If you are retired for example, you may not have any way of replacing the capital in future years. Once used, it’s gone forever, no-one can accurately predict how many years they will continue to live and therefore know how long their capital needs to last.
So if you are not one of the fortunate minorities with significant capital, several income streams and no need to worry, then you can’t afford to do nothing and need to seek a solution. There is however no right answer for everyone, what’s right for some, is not for others. We all have different attitudes towards risk, timeframes to invest, amount of capital and so on. Investments are often made with our emotions and we all think differently. There are hundreds if not thousands of financial instruments available so deciding which solution is best for you can be laborious, confusing & time consuming. It’s important to find a qualified financial advisor who is independent and can provide you with unbiased advice. So why not act now and safeguard your future against inflation!
For advice or more information you can contact me, Daniel McGonigle, on (+351) 912 792 998.
The financial advisers trading under WorldWideBroker Portugal are members of Nexus Global (IFA Network). Nexus Global is a division of Blacktower Financial Management (International) Limited (BFMI). All approved individual members of Nexus Global are Appointed Representatives of BFMI. BFMI is licenced and regulated by the Gibraltar Financial Services Commission (FSC) and bound by the rules under licence number FSC00805B.