As a child in the eighties, I can remember heading off to the local newsagents to buy a good selection of cola bottles, beer bottles (yes, the sweets), panda chews and sherbet lemons with my 20p pocket money on a Saturday morning. When I take my girls to the pick-and-mix nowadays, though, we cannot keep the cost below £2, even though we are health-conscious parents and restrict their sweet tooth! That’s inflation, and not just a Daddy who likes spoiling his girls.
"You need to find an investment a rate of return greater than investment but you need to review this continually to make sure you are effective."
The same happens to your money. If you were to stuff your hard-earned cash under the mattress, when you took it out a year later you would still have the same amount there, but it would actually be able to buy you slightly less. So, whilst you put £100 under the mattress, in real terms it is now only worth £97. People usually miss this because they can still see the £100, not realising that inflation has occurred gradually, in front of their very eyes. At worst, you need to be making sure your money is keeping track with inflation; at best, you want to get it to grow a bit faster than inflation.
The first mistake that people make with their investment choices is forgetting to assess their money’s growth in relation to inflation. It is growth over and above inflation that is important, not whether the balance has gone up. If you are getting 2% interest after tax, but inflation is at 3%, you are losing 1% of your money each year. As a result, you must keep inflation in mind when assessing your financial progress.
By selecting, and continually reviewing, the rate of return on your investment, you will have a better chance of beating inflation. Also, by saving money in an account that offers a rate of interest, you could also benefit from compound growth and pound cost averaging, which could significantly boost your overall wealth.