How to Tackle the Biggest Threat to Your Wealth: Inflation (a.k.a. the Silent Pickpocket)

I’ve seen numerous investment portfolios that appear to have been designed by a dartboard: random, mismatched, and entirely disconnected from the owner’s lifestyle and goals.

Typically, they comprise a few low-risk savings accounts (so far, so boring) along with a collection of long-term investments aimed at dazzling returns or a bit of extra income to supplement the pension.

But here’s the kicker: your money should work for you, not sit idle like an entitled teenager raiding the fridge. Want to get smarter about it? Consider this: maintain an emergency fund, stash some cash in low-risk accounts for expenses in the coming years, and invest the remainder with a strategy that genuinely reflects your life.

The Real Wealth Thief: Inflation

Let’s talk about inflation, because if your money were a bucket, inflation is the slow, sneaky leak you barely notice… until it’s too late.

Many people worry about taking too much risk in the markets, but just as often, the opposite happens: they take too little.

Terrified of market swings, they park everything in deposit accounts, breathing easy knowing they’ll have the same amount next year (plus a smidge of interest). Except… they forgot to invite inflation to the party.

Imagine this: you have £1,000 in a savings account earning 1%. Next year, it turns into £1,010. Sounds good, right? But if inflation is 3%, then in real terms, you’ve got the spending power of just £979. Surprise! Your money just got mugged by inflation, and you didn’t even see it coming.

To keep pace with inflation over time, you may need to take on a bit more market risk, but history suggests it’s worth it. It’s like exercise: uncomfortable at first, but better for you in the long run.

And remember: if you’re on track to never run out of money, why gamble for more than you need? That extra risk could be counterproductive. Aim to grow your wealth just enough to keep up with inflation or slightly exceed it. That’s all most people really need.

Structure Matters: Asset Allocation and Costs

Another smart move? Get your asset allocation right and keep costs low. Not only will you improve your returns, but you will also be able to ignore all that noise from the financial industry trying to sell you magic beans.

This industry is full of promises: “Beat the market!” “Pick the winning stocks!” “Double your returns overnight!” If it sounds too good to be true… it probably is.

Research consistently shows that a solid asset mix and low fees matter far more than a fund manager’s swagger, market timing wizardry, or gut feelings. (Spoiler: none of them have a crystal ball.)

Lifestyle First, Then Finance

Your income needs don’t stay the same forever so why should your financial plan?

Take retirement, for example. You’ll likely want to indulge a bit in the early years (travel, hobbies, maybe a red convertible?), but spend less later on when Netflix and early nights become more appealing. Yet most people are advised to take a flat income throughout retirement. That’s like eating cold porridge every day you can, but should you?

Cashflow modelling can assist you in better planning and enjoying your money when it truly matters.

Here’s the bottom line: your wealth exists to support your lifestyle, not the other way around. And if you don’t know what “enough” looks like, then you don’t really have a plan. You’re just winging it.

Are you keeping up with inflation? Or is it sneaking off with your wallet?
Score your financial planning skills at Financial Planning Scorecard.