Why it’s Important to Beat Inflation with Your Savings

Think back to when you were a little kid and how 10p could get you a whole bag of super-scrummy sweets. Or how about a cinema ticket? Back in the 90s you’d still get change from a fiver. Fast forward to the present day, however, and things are a little different. A bag of sweets will set your kids back about 50p, and you’re doing well if you can grab a cinema ticket for under the £10 mark. That’s inflation for you.

If you’ve got cash to invest, how is inflation going to affect you? Ignoring current interest rates and keeping things simple for the purpose of this blog, let’s go with this example…

Perhaps you’ve got £1000 to set away in a handy little savings account that has an interest rate of 1%. After a whole year of investment, your £1000 will have turned to £1010. Party time! While that may look like you’ve made a princely £10, if during the period you’ve invested your money, inflation rates had risen above 1% to 2% say, then actually, you’d really needed to have £1020 to stay in line with inflation.

Outside of your savings account bubble, product prices will have risen – the sweets and cinema tickets will have got more expensive, so actually your savings rate of 1% won’t really be much help to you. Overall, by locking it away in an account with a 1% interest rate you’ll have sadly lost purchasing power…and that’s why it’s important to ensure your savings account beats inflation.

It’s a strange one, but in effect, having a savings account with an interest rate below inflation basically means you’re losing money.

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And who wants that?!

So how can you beat inflation rates with your savings? It can be tricky, and to be honest, you’ll probably have to shop around for the best option for your own particular circumstances. For instance, a normal savings account will probably not be your best option, but a fixed-rate savings bond could well be.

You may also be better off with a high-interest current account. A few current accounts offer introductory rates with increased interest rates which then drop after a set period of time.If you diarise to switch once this period is over you can keep beating inflation and ensure you make the most of your money. Just make sure you don’t leave funds in long-dormant ISAs with the lowest rates.

By being savvy with your money it is possible to beat inflation and make money on your savings – it just takes a little shopping around. Be in control of your money and you’ll reap the benefits over the long term.

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Last updated: May 22nd, 2018

Eve Hooper

A retired City worker who resides in deepest rural Essex. Eve writes on personal finance for fun and to help educate other older savers.

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