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Your pay packet probably won't beat inflation - but your portfolio can

There is a way to beat the cost of living crunch, and it doesn't have to mean working multiple jobs. Your choice of investments can see your income outpace inflation.
By · 19 Mar 2024
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19 Mar 2024 · 5 min read
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We’ve been hearing a lot about inflation recently. But you don’t need to be an economist to know we’re paying a lot more for the basics. 

Food is up 4.5% compared to last year. Healthcare costs 5.1% more. And watch out when the renewal notice arrives from your insurance company – premiums have jumped 8.1% over the past year. 

Meanwhile, wages have moved forward at glacial speed. 

Wages grew by just 4.2% last year. For many Australians, it means their income is only just keeping pace with inflation of 4.1%.  

Unfortunately, the prospects of a decent pay rise in 2024 aren’t great.  

A survey by the Australian HR Institute found employers expect to increase wages by around 3.7% in 2024. 

Things may improve from 1 July when stage 3 tax cuts kick in.  

A worker on average weekly earnings of $1,432, can expect about an extra $30 in take-home pay each week. Every bit helps, but it won’t line your pockets with silver. 

If you really want to boost your income, it can pay to take a look at your investments. 

The upside of high inflation 

The plus side of high inflation, and the Reserve Bank’s efforts to tackle the problem with rate hikes, is that returns on savings accounts have improved.  

If you can keep up with the conditions required to earn bonus rates, your spare cash could earn around 5% in a savings account. 

The drawback is that your account might grow by 5% interest over the year, but thanks to inflation it’s losing 4.1% of its purchasing power.  

So, in real (after inflation) terms, cash in the bank is creeping ahead by less than 1%. And this assumes you’re earning a top rate of interest.  

Growth assets can smash CPI increases 

When it comes to beating inflation, the solution can lie with growth assets such as shares, exchange-traded funds (ETFs) and property, which can rise in value over time.  

Sharemarket investors, for example, have done quite nicely over the past year.  

As I write, Aussie shares have jumped in value by about 10% over the past 12 months. The sweetener is that dividends have added a further 4.5% return.  

That brings the total return on Australian shares to roughly 14.5%, which has smashed inflation over the past year. 

What to be aware of 

Is this result a one-off? No. Aussie shares have delivered total annual returns averaging: 

  • 8.89% over the past three years 
  • 8.65% over the past five years, and  
  • 8.16% over the past 10 years.  

The answer isn’t to put everything you have into shares. 

Growth assets have a lot more risk than savings accounts. Returns are not guaranteed, and past returns are no guide for the future. Investors also need to weather plenty of market ups and downs over time.  

What matters is finding the balance that’s right for you between risk and returns. However, if you’re comfortable taking on more risk, shares and ETFs can do plenty of heavy lifting to give your income the boost it needs to outpace inflation. 

Bear in mind, with growth assets such as shares and property, ‘time in the market’ is the best strategy, so five to seven years should be your minimum investment timeframe.   

 

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Paul Clitheroe
Paul Clitheroe
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