Investing Money – Invest Your Way Out Of Inflation

Interest rates and inflation have been in the news in the past few days. There is probably no doubt that interest rates will be going up very soon.

If you have managed to get round to learning the basics of investing and are now ready to start investing, you may want to consider a few things as you make that decision.

Savings and Investing – The Difference

Savings and investing are very important for building a stress free financial future. They are both very important habits to cultivate if you want to ensure your financial future is stable.

Ensuring that you understand the difference between the two of them is important. It will help you when creating your financial plan to meet your financial goals.

Although savings and investing both play a great role in your financial future, they have different impacts on your finances.

Saving

When you save, you keep money away to meet a short term financial goal or take care of some emergency expenses that may arise.

The money is kept in an easily accessible savings account which can be made available quickly when the need arises. You should have an emergency fund for the unforeseen – at least 3 months worth of your expenses, but the more the better, 6 months to 12 months are ideal if you can.

Advantages of savings

Savings have less risk, in fact, the biggest risk to savings is Inflation – a reduction in the purchasing power of your money. Just ensure that your money is saved in a bank account that is insured by the Financial Services Compensation Scheme (FSCS). With this, your money is insured up to £85000.

Another benefit of savings is that, you are aware of how much interest will be paid on your savings right from the onset. When you open a savings accounts, you know upfront the interest rate payable on your savings.

The 3rd benefit of savings is that your money is immediately accessible. Take note that because it is easy for you to access your money, it can drift you away from your goals if you are not very disciplined.

Investing

Investing is also putting money away for the future but unlike the cash you save, investing has risk involved. But in exchange for the risk, is a higher rate of return. For example, contributing into your work place pension is an example of an investment for your retirement.

The advantages of investing

As stated above, investing provides a higher rate of return. For example, you could invest in a fund that yields a 9% rate of return. Note that past performance often doesn’t guarantee future returns which is where the risk factor comes in, but history has shown that you can grow your money with the help of investing.

Investing helps to fight inflation. If you find an investment with a good rate of return, it helps protect your money against the fangs of inflation.

Invest Your Way Out Of Inflation

You should build both your savings and your investments but it is important that at each stage of your financial journey, you know what your priorities are. Your priorities at any point in time depend on your financial goals.

Inflation eats into your money with time. So if you keep it sitting there in a bank account especially when the current interest rates on savings is less than 0.01 percent, then you definitely will realise that your money’s value will go down significantly due to inflation by the time you get round to using it.

Inflation rates vs interest rates

Last week the Bank of England warned that inflation rates could peak at 6% by April 2022. Despite that warning, the interest rates were increased to 0.25% from 0.10%.

This rise in the base rate of interests by the Bank of England, means that the amount you earn on your savings will go up, but to how much? I am glad you asked. That will mean an increase of 0.15% on your savings.

Inflation is being predicted to rise to 6% while the interest rate on your savings is only increased by 0.15%. That means for every £10000 you save, you get £15 of interest for the whole year.

How is Inflation regulated?

As a rule, when the inflation rate is high (that means prices are going up – you must have noticed how the price of almost everything in your local shop has gone up),  the money you save in a bank account loses its value over time since the interest earned on your savings is no where close to the rate of inflation ( 0.7% savings vs 5.1% inflation). That means you will not be able to purchase what you can with that money today in a few years time.

What is Inflation

Inflation is the rate at which prices are rising. That means, if a tin of tomatoes cost £1 and the price rises by 5p, which you probably would have noticed this year, that means, the inflation rate on the tomatoes is 5%.

How can you protect your money from the fangs of inflation?  

In my younger years, the term investing in my mind was immediately followed by; ‘I need a large amount of money, I need to learn some complicated stuff to understand how it works.

I now realise that my impression of investing was down to the people I met and worked with.

Today, even thought many years have passed and I may not be able to achieve as much as I would have wanted to if I knew what I know today many years back, I am comfortable with investing and I now know that you don’t need a lot of money to start investing.

You do not need to learn anything complicated either to join in and take advantage of investing your money, no matter how small it is.

In fact starting small is actually a good thing as it will help you understand the processes and help you make your mistakes with little amounts before you start thinking of putting in large amounts of money.

Now that we have all that basic stuff about inflation and how it impacts on your money out of the way, if you are looking at investing, the one thing I want to talk about today is helping you understand how your choice of what you invest on can help you position your money so that it is covered from the impact of inflation.

If you are considering investing in stocks, maybe you have some money in your stocks and shares ISA and you are thinking of where to invest, consider inflation proof stocks that will offer your money some protection against the rising inflation rates (Note, this is not financial advise and not a suggestion that you buy anything. It is just Education so that you make a better financial decision).

There are different categories of stock that will give you some protection against inflation and market uncertainties due to changes in interest rates.

Category 1: Dividend paying companies 

These are companies that will pay you dividends for holding their shares. When you hold shares in  a particular company, you are considered a shareholder of that company. That means, when that company trades and makes a profit at the end of their financial year, they may decide to share some of the profits with their respective shareholders. These profits are often shared based on the number of shares held and the type of shares held.

The best types of companies to look out for, for these types of investments are the dividend aristocrats. Who are these companies?

Dividend Aristocrats

These are companies that have proven themselves and have for a long time increased their dividends to their investors every year for a period of at least of 25 years.

In 2021, there were about 65 dividend aristocrat companies in that list (please do some research of your own to find these companies). The basic criteria for a company to be part of the dividend aristocrat list is that:

• They have to be part of the FTSE 100

• They have to be reporting profits (note that dividends are paid out from profits after tax. No profits means no dividends as there will be nothing to pay out as dividends)

• They must have an average daily transaction volume of at least $5M for every trailing 3 months period at every rebalancing date. This means people are actively trading their shares consistently. People are buying and selling their shares on the stock market all the time

• The company must be worth at least $3billion at the time of each S&P quarterly rebalancing

Don’t let the jargon intimidate you. Just know that these companies are very stable companies that have met certain defined criteria to be classified as dividend aristocrats.

That means, in as much as investing is always risky,  (you should never invest what you cannot lose), these companies have proven themselves and are considered safe to a certain degree when it comes to investing.

They have strong cash reserves, and very strong financials in general so they are good companies to invest in. The movement in the share price for these companies doesn’t matter. Whether the share price is going up or down it doesn’t matter. Dividends will be paid out.

When doing your research, do not focus on the companies that have the highest rate of dividend only. Also look at what these companies actually do.

I have learned that the companies that really do well with dividends are companies that offer products and services that people need on a daily basis. Consumer goods for every home, for example, Procter and Gamble, AT&T, MacDonald’s, Palmolive, beverage companies, people do a lot of drinking.

These are just example of the type of companies you should look out for. Note that this is not financial advice. (check list and change company examples)

Category 2: Companies that are capable of passing on increased cost to their customers 

Inflation is the rise in the prices of goods and services around us. So it follows through that when inflation increases, the companies who provide these goods and services transfer the prices to the customers, reason why your cost of living increases with inflation. examples include; energy prices, fuel prices, if it cost these companies more money for the production of these products,  they simply pass that costs on to their customers.

If you are looking for a company to invest in, this is a positive thing because the additional cost that would have eaten into their profits is passed on to their customers, leading to higher profits and therefore a positive impact on their share price.

Companies in this category that will do well include, financial companies – JP Morgan, Goldman Sachs, American Express, Wells Fargo,  energy companies ( Royal Dutch Shell, BP). You can add these companies to your portfolio to help you protect yourself against inflation. Please always remember to do your own research.

Category 3: Cryptocurrencies

Cryptocurrencies have become a thing these days and the big organisations are using it as a hedge, particularly Bitcoin. It is seen these days as digital gold and you can use it as well as a hedge against inflation. Note that cryptocurrencies are highly volatile and you should be sure to do lots of research about it and understand what you are doing before you put any money into it. It is highly volatile but it is still used as a hedge against inflation in the long term.

I have found the following cryptocurrency platforms easy to use:

Nexo – The Nexo platform is a regulated digital assets institution offering the opportunity to buy and hold crypto assets, with the opportunity to earn interest on assets held. You even earn interest on your fiat currency. They have very good interest rates of up to 12% per annum depending on how your manage your portfolio. They gives digital asset holders the best of both worlds, instant cash access and high interest yields. The platform is very easy to use. You can learn more about the Nexo platform here 

Coinbase is also one of the biggest cryptocurrency platforms and exchange listed on the Stock Exchange Market. You can find out more about them and how you can buy and hold cryptocurrencies using their platform here

Now it is your turn to take some action. Go ahead and do some research now that we have covered the basics and get yourself some inflation proof shares.

Are you already holding any of these share? What are your thoughts on the categories listed above? Are you already holding bitcoin? Let me know in the comments below.