How a financial plan could alleviate your inflation worries

The uncertainty of how the cost of living will change during your lifetime can make long-term planning difficult. After all, how can you be certain how your expenses will change in 20 years or more? If you’re worried about the effect of inflation on your security, a financial plan could provide peace of mind. 

Research from Ipsos found that inflation is the number one global concern in 2024. Among the 29 countries that are part of the research, 35% of people say inflation is their top concern – in Great Britain, 37% said they were worried about it. 

Given the soaring cost of living over the last two years, it’s not surprising that it’s on many peoples’ minds. Inflation has placed pressure on household budgets around the world, and it may have affected your long-term plans too. For example, you might have cut back your savings or pension contributions to reflect rising day-to-day costs.

In the UK, the Bank of England (BoE) aims to keep inflation at 2%. However, it began to rise above this target in mid-2021 following the Covid-19 pandemic and war in Ukraine. Inflation peaked at 11.1% in October 2022 – the highest figure recorded in more than 40 years. 

While inflation is now nearing the BoE target at 2.3% in the 12 months to April 2024, you might be concerned about how another period of high inflation could affect you in the future. Luckily, a financial plan can help. Here’s how.

A financial plan could help you calculate how your assets and expenses will change over time

A key part of financial planning is understanding how to create long-term financial security. To do this, you’ll often consider how the value of your assets and your outgoings will change over time.

Cashflow modelling could help you visualise the data and see how your assets will change over decades. 

You often start by inputting the value of your assets now, from savings to property. Then, you can assess how they might change during your lifetime. Some of the changes will be based on your actions. For example, if you’re regularly contributing to your pension, the value is likely to grow. 

Other changes might be outside of your control, but you can make certain assumptions to give you an idea of your long-term wealth. For instance, if you’re investing, you might assume that the returns will be 5% each year based on your investment strategy.

Investment returns cannot be guaranteed, and there are likely to be years where your portfolio falls short of or exceeds this assumption. Even so, cashflow modelling can still provide a useful indicator of the value of your assets at different points in your life. 

You’ll also need to input your expenses and factor in how these might change too. This is where you may want to consider inflation. You may account for the cost of living rising by 2% each year in line with the BoE’s target. 

Of course, the unexpected does happen, including inflation rising above the BoE’s target. Cashflow modelling could help you understand how the unexpected might affect your finances.

Cashflow modelling may help you visualise the effect of high inflation 

You can change the assumptions used in cashflow modelling to answer your questions and understand how different scenarios would affect your finances.

For example, you can change the data to calculate how inflation of 8% when you’re retired would affect how quickly you deplete your pension or other assets. 

With a clearer idea about the effect high inflation could have on your financial circumstances, you might take steps to reduce the potential impact. You may choose to ensure you have other assets to fall back on to provide peace of mind, or you could focus on how to grow your wealth through steps like investing so you’re in a better position in a high-inflation environment.

Cashflow modelling can be useful if you want to model other scenarios too. For example, you could see how:

  • Taking a lump sum from your pension would affect your income in retirement

  • You’d weather a financial shock if you were unable to work due to an illness

  • Lower than expected investment returns may impact the value of your estate

  • Gifting assets to loved ones could affect your long-term financial security

  • Needing to pay for care later in life could affect your wealth

  • You could retire early by taking a lower income or increasing contributions during your working life.

So, financial planning could be beneficial if you want to be prepared, both for reaching your goals and for the unexpected.

Contact us to talk about how to manage the impact of inflation on your finances 

There could be steps you can take to manage the risk of inflation affecting your finances in the future. Please contact us to arrange a meeting to discuss your long-term financial plan and how we could support you. 

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.  A pension is a long-term investment not normally accessible until 55 (57 from April 2028). 

The Financial Conduct Authority does not regulate cashflow planning. 

Duncan Farrar