Are you in danger of falling prey to the financial assassin?
Sitting on a large pile of cash might make you feel cozy and secure. However, it is akin to letting real money flow down the plug hole.
Why? Due to inflation.
Inflation is simply a general rise in prices. It means that your current money will buy less in the way of goods and services in the future.
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For example, if you have GBP250,000 in cash – based on inflation at 2.5% – your money would allow you to buy the equivalent of GBP6,250 LESS next year.
Do that for 5 years and it adds up to a new BMW 3 Series.
These figures aren’t “pie in the sky” either. In the UK, inflation has averaged 2.57% per annum since 1989 and there have been times when it has been much higher. Here in Poland, while the official inflation rate is currently 2.2%, it has averaged 8.31% per annum since 1992.
What can you do?
There are three things that you can do to stop the financial assassin that is inflation.
1. Work out how much cash you will actually need to fund your lifestyle for the next 6-12 months.
This is your emergency fund. It should provide you with a feeling of security. Be realistic, think about what would happen if you were unable to work due to illness or lost your job.
2. Keep this money somewhere that is safe and easily accessible.
It won’t earn you any interest and that’s ok. That’s not the point here. The important thing is for this money to be available when you need it.
3. Invest the rest
The best way to combat inflation is to invest your money. Build an investment portfolio that is simple, well diversified and low cost. Then stick with it.