Inflation is sometimes described as the silent assassin of wealth. Which is why we need to understand it, the effect it may have on our assets and how we can combat it.
What is Inflation?
In basic terms, inflation is the rate at which the price of goods and services increase over time. It is caused by a general upward trend in prices resulting from a spike in demand or an increase in production costs. The main consequence of inflation is the decrease in your money’s ‘real’ purchasing power.
Let’s take an average loaf of bread as an example of inflation:
- If it cost €1 a year ago but €1.03 today, the inflation rate was 3%.
- If it cost €1 a year ago but €1.05 today, the inflation rate was 5%.
How to Combat Inflation
According to the Central Statistics Office, cash in your balance sheet is currently declining at around 8% in real value due to inflation. This means that as a business if you are planning to purchase in the incoming year, you will have to pay 8% more next year. If you can’t get a similar return on your capital, it will cost you that 8%.
Clearly, leaving cash sitting in the bank is not the best option. Obviously, this excludes the cash flow you need to run your business or manage your household, but all excess above operational cash flow should be working for you.
In an inflationary environment, investing your money is your best option. Pensions are ideal to protect against inflation simply because of the tax relief involved. Corporation tax is 12.5%, and personal tax relief is at 40%, or even 52%. If we think about this logically, all those numbers are much higher than that earlier 8%.
Additionally, the money you pay into your pension is invested – most often in the stock market- so that it grows over time.
If you want to beat inflation, get your money off your balance sheet and into your pension. It will automatically beat inflation due to investment growth and the tax relief available.
Now is the Right Time to Invest and Get Yourself a Return
With rising inflation, now is a prime time to increase your retirement savings by putting additional funds in a private pension or alternative investments.
Many business owners will come to us and say I want to do X, Y and Z, and then fund my pension in 5 years. That strategy isn’t wrong, but it may not be the best approach.
The best way to get the most out of your money in a period of high inflation is to get your money off the balance sheet and into your pension. It will give you far better results in the future.
Why? Firstly, you’re getting into a changing stock market so you’re likely to get a better deal on investments. Secondly, if you can offset an inflation increase with a bit of tax relief, why wouldn’t you? Finally, and most importantly, who knows what the future holds? Our advice is to take advantage – now.
Getting money out of your business and into your own name should ultimately be the goal of any business owner. It all boils down to efficient wealth extraction.
Although pensions are not the only leg of a strong wealth extraction strategy, we always stress that pensions are a hugely important part of the process, particularly in today’s market.
Don’t let inflation erode your money, leave your money under the mattress, or even pay it into a low-interest savings account. Protect yourself against inflation and invest your money in a pension. It will more than likely grow at a faster rate than inflation over time. It is a no-brainer!
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There’s never been a better time to tackle your investment strategy to ensure you’re combatting inflation through these volatile times. Join us at 9 am on Friday, 30th of September, as Pramit Ghose of Cantor Fitzgerald and Robert Whealan, our Managing Director at Rockwell Financial Management, discuss investing in a turbulent market.
Pramit Ghose has over 20 years of experience in asset management and global strategy, making him the perfect candidate to share his knowledge on the topic.
Register for our free Inflation Through Volatile Times Webinar.
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For pension and investment advice, chat with one of our expert advisors. Get in touch with us today to make smarter, better-informed decisions.
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