You will probably have seen in the media that the average inflation rate across the eurozone reached 8.1% in May 2022, up from 7.4% the month before. This means that 343 million people are living with the highest levels of inflation since 1997.
With this in mind, it’s likely you have felt the increasing cost of living in just about every area of your life, with the price of food, clothes and, of course, energy, skyrocketing.
While paying more cash just to maintain your standard of living is depressing enough, inflation also has the potential to reduce your wealth in real terms.
Inflation is the rising cost of goods and services, and if your money is not keeping pace with inflation, it’s losing spending power and real terms value. Additionally, research by Legal & General (L&G) suggests that if you’re aged between 40 and 60, your wealth might be even harder hit by the rising cost of living.
The reason is that this age group is most likely to be supporting adult children or elderly relatives financially, which could increase inflation’s impact on their money. Read on to discover why this is and, if you are helping loved ones, three positive steps you could take to help inflation-proof your money.
Inflation could hit your finances twice as hard if you’re supporting others
According to L&G’s study, if you are helping others financially, your money could be hit twice by soaring inflation. This is because the rising cost of living not only pushes up your own household bills, but it also increases the bills you are paying on behalf of someone else.
If your money is being hit twice by inflation, it could then double the impact it has on your finances, and significantly reduce the value of your wealth in real terms. There is some good news though, as you might be able to better inflation-proof your wealth and mitigate its effects on your money.
Let’s consider this now.
1. Calculate your personal inflation rate
As official inflation rates are typically an average taken across a region or country, your personal inflation rate might be different. Your spending is unlikely to exactly match the official figures, as the goods and services you mostly buy may be rising in price at a faster (or slower) rate than the average.
So, for example, if you live in a larger house and use more energy to keep it warm, your personal inflation rate might be higher. If you drive a lot, the rising cost of fuel may also mean that your rate is higher than the average.
By calculating your personal rate, you could adjust your spending to help mitigate the effects of inflation on your wealth. To do this, add up your current monthly expenditure and compare it to previous years (make sure this is for regular expenses, not one-off items).
This means that if you spent €4,600 in March 2022 and €4,000 in March 2021, your personal inflation rate increased by 15% in the year between.
Understanding this means you could adjust your spending to mitigate inflation’s effects on your finances.
2. Invest your money
Over the long-term, the stock market typically offers greater growth potential than cash savings, which may help shield your money from the rising cost of living. To demonstrate this, you might want to consider the following illustration, which shows the annual return of some of the major stock indices over the 10 years to 2021.
Source: JP Morgan, MSCI, Refinitiv Datastream, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management. All indices are total return in local currency, except for MSCI Asia ex-Japan and MSCI EM, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 31 January 2022.
As you can see, with one or two exceptions, stock markets over the last decade have tended to produce positive annual returns despite economic uncertainty and the Covid pandemic.
As this year reminds us, the markets do not always go up and never go up in a straight line. We have periods where the financial markets fall in value, but they do typically increase in value over the long term, as the table demonstrates.
Always remember that the value of your investment can go down as well as up, and past performance is not a reliable indicator of future performance.
3. Rebalance your investments
If you already have investments, they will typically comprise of different assets such as stocks and shares, government bonds, cash and, potentially, property. Over time, these assets increase or decrease in value, which could reduce their growth potential or expose them to unnecessarily high levels of risk.
Rebalancing investments can realign them to where they should have been originally. This could help improve growth potential, which, in turn, could provide greater protection against the effects of inflation.
Get in touch
As specialists in helping expats in Europe, we could help you inflation-proof your wealth if you’re supporting adult family members financially, whether that’s here in the EU or further afield. Email us on [email protected] and we’d be happy to discuss your situation further.
This article is for information only. Please do not take action that is based on anything you read in this article until you have sought professional advice.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.