I am worried. But it is not the volatile market that is bothering me. That is something we need to accept when we invest in shares. I am not too worried about the Russian-Ukraine war, either. The world is full of nutcases. And we have to accept that nutty people are liable to do nutty things.
I am not too concerned about a possible recession. It is a sign that an economy is functioning normally. After a prolonged period of economic growth, it is perfectly understandable why we need to pause for breath.
I am, however, worried about the impact that all those things could have on the long-term savings of households. For nearly three decades many economies around the world have enjoyed relatively low rates of inflation. In the US, it has been between 0% and 5%. In the Eurozone, it has also been between 0% and 5%.
But recently, the rate of inflation has climbed very sharply, very quickly. Unfortunately, it has been the price of things that we can’t do without that have shot up exponentially. These include fuel for our cars, food that we put in our tables, and electricity that power the things we use daily.
Put another way, these are non-discretionary purchases. There is something else that we don’t have much discretion over, namely, monthly mortgage repayments, if we have a home loan. And if interest rates should rise, that could put additional strain on household budgets.
But where does long-term savings, or saving for our retirement fit into the grand scheme of things? Should it be classified as discretionary or non-discretionary spending? Some might consider it as a luxury. But consider this, every $100 that we don’t put to work in our pension pot today could mean $1,000 less when we retire in 30 years’ time.
How will we be able to replace such a large chunk of change when we stop work and don’t have an income? So, whatever we choose to cut from our discretionary spending, long-term savings should not be one of them, if at all possible.
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