Regular direct debit investment offers two unique though linked benefits. On the one hand, it encourages discipline because each monthly payment no longer requires conscious thought but rather occurs automatically and covertly. However, regular monthly investing allows investors to ride market cycles by using “pound-cost averaging,” where each investment is made at a different price, so that it all averages out and you are less concerned about potentially timing the market.
But are individuals saving enough even in light of growing inflation? This is because, if greater inflation is sustained, your investing goal—be it a comfortable retirement or a wedding—may end up costing more than you originally anticipated.
This leaves you with three main options: decrease your expectations with more achievable targets, put in more hours at the office, or maintain your present goals while increasing your regular current payments (if you are able to) to ensure that you can continue paying for them in the future.
Sample of a wedding fund
Consider a straightforward opportunity to illustrate what we mean. Imagine a father setting up money for a future wedding of a son or daughter. They know that the average cost of a wedding is about £17,0002, but they want to be able to afford it if it occurs. This would require saving £250 each month for five years, assuming an average yearly investment return of 5%.
However, after seeing how the inflation wind is blowing for a year, they conclude that just to be safe, £25,000 is probably a more realistic aim for their wedding budget. The reason is that anything that isn’t utilized might always be a lovely wedding gift.
Example of a retirement fund
Another hypothetical situation involves a 54-year-old who plans to retire at 62 and has £200,000 saved for his or her pension. They believe they can almost treble this fund in the meantime by setting aside an extra £1,600 each month3 in both their job pension and self-invested personal pension (SIPP).
They feel it’s not enough and would rather strive for double their retirement income, however, alarmed by the growing expense of living. According to their calculations, the amount will be closer to what they would require to preserve their purchasing power in terms of today’s money or after inflation has been taken into account.