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The uncertain economic outlook caused by the ongoing COVID-19 pandemic has highlighted the importance of understanding the impact of inflation on your savings.
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What is Inflation?
Inflation refers to the gradual increase in the prices of goods and services over time. This means that the purchasing power of money decreases, as it can buy less than it could in the past. The rise in inflation can be attributed to various factors, such as increased demand for goods and services after the easing of COVID-19 restrictions, supply chain issues, and higher oil and gas prices.
When it comes to savings, the effect of inflation is significant. In recent years, savings accounts have not offered substantial growth due to historically low interest rates. However, with inflation on the rise, there is a risk that the value of savings may decline in real terms, meaning that the money saved will be able to purchase fewer goods and services.
How Does Inflation Impact on Your Savings?
To illustrate this, let's consider a hypothetical scenario where inflation averages 3% annually over the next five years. If you currently have £10,000, it would be equivalent to £11,592.74 in 2028. However, if you were to deposit this £10,000 in a savings account with an interest rate of 0.5%, you would only earn £252.51 in interest over the same period. Consequently, you would effectively lose £1,340.23 (11.6%) in terms of purchasing power.
What Can You Do to Protect Your Savings?
To mitigate the impact of inflation on savings, there are a few strategies you may wish to consider:
Explore investment opportunities: Investing your money over the medium to long term into income producing assets can offer a better chance of beating inflation and protecting your savings. Investments have the potential to increase in value over time as well as providing an income. By diversifying your investments, you spread the risk and increase the likelihood of achieving favourable returns. Investment options can be tailored to your risk tolerance and financial goals. It's important to note that investments can also experience fluctuations in value, and there is a possibility of receiving back less than the initial investment.
Monitor interest rate changes: Interest rates in the UK are determined by the Bank of England, to manage inflation and stabilise the economy. When interest rates rise, it may positively affect savings, but it can also lead to increased borrowing costs for credit cards, loans, and mortgages. While rising interest rates might offer some benefits for savers, they are unlikely to meet the % level of inflation.
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Speak to one of our team today to find out about our inflation busting investment opportunities.
