Five ways to dodge this shocking financial threat

Inflation …

It’s not a word that really sets my heart racing.

In fact, it sounds about as exciting as a slow day at the library.

But before you consign “this boring post about inflation” to your trash file – I’d like to point out just what you need to know about this week’s inflation numbers – and why they matter a great deal to you.

This is the 21st consecutive month (yawn – enough already!) that the Bank of England has failed to meet its inflation target of 2 per cent, so it’s understandable that we’ve become desensitized.

However, these numbers affect us all – and some of us more than others.

Food inflation is running at 5.6 per cent …

Clothing at 13.2 per cent …

And heating costs are rising fast enough to make me wear that dodgy Christmas jumper my mother-in-law gave me last year!

If you have a job – it’s unlikely that your boss has given you pay rise that can match inflation.

And if you’re retired and living off savings – you’ll already know all too well what I’m talking about.

The consumer price index is now standing at 4.5%. And it’s big brother, the retail price index (which includes the housing costs that most of us have to bear) is at 5.2%.

And once fuel prices really kick in this month, the CPI is expected to hit 5%.

And it gets worse …

Now, for any income that you’re being taxed on, you’ll need to earn above inflation just to stand still.

If you’re a basic-rate tax payer, and inflation is 5%, you’ll need over 6.25% to beat inflation. And if you’re a higher-rate tax payer, you’ll need over 8.34%.

Did you try asking your boss for an 8.34% pay rise?

Or check if your bank is offering a savings account at that rate?

I didn’t think so.

We shouldn’t underestimate just how valuable the tax-free status of spread betting can be to our financial wellbeing.

What we can do about it

This is a very important time to take a hard look at your money – and whether it’s working as hard for you as it could.

You can’t afford to take unnecessary risks right now.

But equally, you can’t afford to do nothing.

Here are five steps that I’m taking with my money. You might want to consider them …

1. Diversify

2. Manage risk

3. Use tax-free investments, like spread betting

4. Seek out better rates of return

5. Be realistic

In times of high inflation, it is more important than ever to diversify across different investment types, with different risk profiles.

This means looking at different markets, nationally and internationally, plus choosing to have higher and lower risk options. So, you’ll be looking to invest in different sectors, plus in different parts of the world. (If all your investments are in UK markets – you’re more vulnerable to the falling value of the pound.)

This is a balancing act in more ways than one. You need to spread your investments widely – but go too wide and you risk not being able to keep on top of them all.

If you have 10 forex trades on at one time – can you really manage those entries and exits successfully?

Be realistic about what you can achieve – in terms of how much time you have, and how much profit you can really make.

Now is not a time to be greedy and take big risks. Yes, go for better returns, but be mindful of risk.

Looking for safer choices

Obviously, the options you consider will depend on the size of your fund.

A traditional safe haven in times of high inflation would be gold, and while the precious metal has had some ups and downs recently, the long-term trend is still solidly bullish.

In terms of spread betting in the stock markets – they are still jumpy, so I’m looking at shorter term positions until we have an established trend to follow.

Last week I mentioned trading the Dow Jones. One benefit of following an index rather than individual shares is that it has a level of diversity built in to your trade.

Sure, markets can go up and down unexpectedly – but not with the kind of unpredictability of an individual stock. Plus, with a leading index like the Dow Jones (although it only includes companies incorporated within the US) you have large international companies, which offer a degree of immunity to the ups and downs of the dollar.

The kind of trades I’m talking about are quick and simple – so I know that I can have a percentage of my trading fund hard at work in a diverse market – without taking up too much of my time.

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