Over the past ten years 31% of your savings have been stolen. Hopefully you’ve earned some kind of return on your money to soften that deduction and if you’ve taken some wise investment decisions you may have made it all back and even have made a profit. How has this happened? Who is this thief who has taken nearly a third of your hard-earned savings? Is there someone you can complain to?
The thief is inflation (RPI to be precise). The compound effect of prices rising each year erodes the value of your money. It is a thief who instead of stealing your car, steals 100ml of petrol from that car every night. Day to day it’s such a small amount you won’t notice the effect but over time its going to have a big impact.
Those with debts benefit from inflation as it has the eroding effect on debt as it does savings. As the largest borrower in the country inflation benefits the Government the most. This is at the expense of savers without real assets, i.e. those living hand to mouth or with their savings all in traditional savings accounts. Any other transfer of wealth from a citizen to the state, is known as a tax and requires a law to collect it, hence why the economist Milton Friedman said that inflation is taxation without legislation.
Those with “real” assets (property, bonds, commodities, and shares) typically earn a return over and above inflation. Taking the often-uncomfortable decision to invest in these types of assets is the only way you can protect yourself from inflation. Incidentally, the Government is a big owner of such assets and so benefits on that side of the inflation equation as well. Investments do of course fall as well as rise and the return profile is much bumpier than the regular interest paid by a traditional savings account. But you shouldn’t let this fool you into believing that the savings account is risk free, it virtually guarantees the destruction of your savings over the longer term. Investing in real assets at least gives you a chance of keeping the thief out.