We all know that it’s important to save - a recent survey from Lloyds Bank found that 67% of Brits save “regularly or whenever they can”, and 78% try to save whatever spare money they have. But when you’ve worked hard for your money, it’s important to make sure it’s working hard for you in return. Since 2009, historically low interest rates have meant that many savers have seen the value of their savings eroded over time - but how can you stop it?
How does inflation affect your savings?
Inflation, usually measured using the CPI (consumer price index) is the changing cost of goods and services over time. When inflation goes up, the value of the pile of cash under your mattress goes down because you can’t buy as much with it as you could before - the risk that this will happen to your savings is known as inflation risk.
Because of inflation risk, most of us shun the “under the bed method” in favour of savings accounts which pay interest. However, since the Bank of England set its base rate at 0.5% five years ago, interest rates have remained stubbornly low - much to the frustration of savers. The Bank of England Base rate is the interest rate set by the Bank for loans to banks and other providers; a lower base rate means that it’s cheaper for banks to lend than hold a deposit. Consequently borrowers enjoy lower repayments, while savers suffer from low growth on their deposits.
Currently, in order to beat inflation, a basic rate taxpayer would need a savings account paying 2% interest per annum - a recent survey from Moneyfacts found that the average easy access account pays just 0.63%.
Making your savings account work
It’s not all doom and gloom! Inflation has been steadily falling over the past few months; CPI inflation fell to 1.6% in March, the third consecutive month that it’s been below the Bank of England target rate of 2%. Now that the economy is slowly starting to look better for savers, it’s time to make sure you’re getting the most out of your savings account.
When was the last time you checked what interest rate you’re getting? If it’s been a while, you may want to make sure you’ve not been stuck with a zombie savings account. If you’re not happy with the rate you’re getting, compare savings accounts to see if you could be getting a better deal. It’s worth bearing in mind that, if you don’t need immediate access to your cash, you can usually get a better rate by locking your money away for longer - for example in a fixed term savings account or fixed rate bond. Take a look at our guide to the different types of savings accounts.
What are the alternatives to a traditional savings account?
If you want to keep your savings risk-free (apart from inflation risk) it is a good idea to make sure you’re using up your cash ISA allowance to enable your cash to grow tax-free. If you want to grow your savings more quickly, you will usually have to open them up to some level of risk.
Government bonds (gilts) are a way to generate potentially inflation-beating returns without exposing your money to the risks of the stock market. Essentially you lend your money to the government, which is then repaid at a fixed date with a set rate of interest. Companies also issue bonds, but these are considered to be more risky than gilts, as a company is more likely to go bust than the government - it is important to note that corporate bonds aren’t covered by the FSCS.
Depending on your circumstances and attitude to risk, there are different types of investment which could be suitable for you. Take a look at our guide for more information.
If you want to see how inflation could affect your savings and disposable income over time, try MoneyHub. As well as budgeting for today and planning for tomorrow, you can adjust the predicted rate of inflation to see how changing rates could affect your future net worth.