Canny view: How does today's inflation affect your financial future?

Should you still save and invest when inflation is high? Nick Stewart says the short answer is yes. Photo / NZME

By now we're all well aware of the pocket-pinching nature of rampant inflation. But thinking a little further ahead, what might this mean for your investments and savings?

Should you still save and invest when inflation is high?

Short answer... yes.

I often refer to inflation as the 'thief in the night'. It steals the value of today's money over time.

What that means in practice is, say you had set aside $100 in 2000 - that $100 would have 42 per cent less buying power today in 2022. To buy the same basket of goods in 2022 as you could with $100 in 2000, you would need $172.53 in today's money.

So in a nutshell, inflation impacts your wallet either rapidly or gradually over time by impacting how much purchasing power your money has. You end up spending more for the same goods.

What does this mean for your fiscal future? Are you better to invest, or to save?

As a general rule, short-term goals are better served by savings or low risk portfolios, and long-term goals are better served by investments.

This is because in the short term (like the next five years), you do not have time to wait out volatile markets, and can generally ignore inflation. What you need is what you currently have in hand.

Nick Stewart. Photo / Supplied

With long-term financial goals like retirement planning, you have time. Time is a valuable component in any financial plan – the more you have, the more you can weather in terms of market activity, and the more risk you could take on in your portfolio.

Additionally, inflation is one of those volatile components you can plan for with a robust financial plan. Unlike with short-term savings, your long-term plan must take inflation into consideration – or you could find yourself short on funds earlier than you would like.

Does inflation decrease your return on investment? It can, in the same way it can impact savings by reducing purchasing power.

It's a stealth threat, only posing a risk if your investments don't keep pace with the rise of inflation. As with all risk, this can be mitigated by maintaining a well-diversified portfolio and ensuring your investments are aligned with your long-term goals.

Inflation can be managed with the help of a savvy financial adviser who can adjust for this and make sure you are well positioned for potential returns in future.

How can you get started saving and investing when inflation is impacting your income right now?

The first step is to make a plan. Mapping out current expenses, future expenses, and a budget that will accommodate these can help with overspending by creating a firmer idea in your mind of exactly what your disposable income is.

If you can't increase your income, you can always keep trying to reduce your expenses.

Have you checked out how much you could save by switching to a new phone plan, or a new power company?

If you can't find any easy wins, start by prioritising your spending and categorising needs versus wants.

This can help you shave off areas from the latter category as needed. In the short term, the impact of inflation can be pretty painful. We just saw both inflation and the Official Cash Rate rising again, and it's unclear when we will see a real easing of the breakneck pace inflation has had in the last few years.

For some, the belt can't tighten much further when it comes to being fiscally frugal.

If you can, look ahead and start prioritising your long-term financial health now. A wise course of action is "paying yourself first" – meaning when you get paid, you put some aside into savings and/or your investments, the same as you would any other bill payment.

If you're struggling with the discipline of this, set up automatic payments. Out of sight, out of mind... and more importantly, out of easy access during times where you may be tempted to impulse buy.

Speaking of paying yourself first with automatic deductions... Increasing your KiwiSaver contributions is a great first port of call.

In New Zealand, the voluntary minimum is 6 per cent (3 per cent employer, 3 per cent employee). Compare this to the compulsory super minimum of 10.5 per cent in Australia (to become 12.5 per cent in 2025) and you can see our retirement strategy is lacking. If you can contribute more than 3 per cent of your earnings, it will pay off later in life.

If you're seeking a second opinion on your financial plan or would like some help deciding where to start, sitting down with a trusted financial adviser is a great first step to discovering the best way forward for your unique situation and goals.

We can't turn back time. Things will likely never be as cheap as they used to be in the rose-tinted lenses of yesteryear.

If we prepare now, it won't be such a rude shock when we take those glasses off in future. Short-term pain during lean times is better than the creeping stress of not knowing whether you'll be able to live comfortably in retirement as costs increase.

• Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.

• The information provided, or any opinions expressed in this show, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz