The Impact of Inflation on Your Savings
When inflations rises with the cost of living it can be difficult to make your savings count, there are ways to keep on top it the changes and protect your funds.
The Impact of Inflation on Your Savings
Inflation measures the rate at which prices for goods and services increase, leading to a decline in the real value of money. For example, if inflation in the UK is 3% annually, what costs £100 today will cost £103 next year. While this increase may seem small, over time, it can significantly erode your savings.
Inflation is currently at 2.2% after the latest rise in August, the first rise of the year.
Inflation is predicted to rise further before falling again. The Bank of England is set to make their announcement on the base rate later this week and with inflation rising, could this mean another increase since their latest drop to 5%?
Consider a UK savings account offering a 1% interest rate. If inflation is 3%, your real return is actually negative—your money is losing 2% of its value each year (1% interest - 3% inflation = -2% real return).
Even though your bank balance might grow slightly, the purchasing power of your savings decreases, meaning your money buys less.
Find out more about how inflation works and what it means.
Protecting Your Money from Inflation
Use this money saving help to protect your savings from inflation and make your money go further.
Invest in Assets That Outpace Inflation
One of the most effective ways to protect your savings from inflation is to invest in assets that typically grow faster than the rate of inflation. UK equities (stocks) have historically provided returns that outpace inflation over the long term. By investing in a diversified portfolio of shares, you can potentially grow your wealth and preserve the value of your money.
Property is another asset class that tends to appreciate over time, often at a rate that matches or exceeds inflation. Investing in UK property, either directly or through Real Estate Investment Trusts (REITs), can provide a solid hedge against inflation.
Find out more about investing and how to do this.
Consider Inflation-Linked Bonds
For those seeking lower-risk investments, UK government bonds, such as Index-Linked Gilts, can offer protection against inflation. These bonds are designed to increase in value with the Retail Price Index (RPI), ensuring that your investment keeps pace with inflation. When the bond matures, you receive the adjusted principal, helping to safeguard your savings from inflationary pressures.
Diversify Your Portfolio
Diversification is key to managing risks, including inflation. By spreading your investments across different asset classes, such as UK stocks, bonds, property, and commodities, you can reduce the impact of inflation on your overall portfolio. Commodities like gold, for instance, often perform well during periods of high inflation, providing an additional layer of protection.
Look into the various types of investing to diversify your portfolio.
Increase Savings Contributions
Another way to counter the effects of inflation is to regularly increase your savings rate. As inflation rises, aim to boost the amount you save each month. This approach can help offset the declining purchasing power of your money. Automating your savings through a standing order or direct debit can make this process easier and ensure you consistently build your savings.
You should also look for a savings account that has an interest rate higher than the inflation rate.
Review and Adjust Your Budget
Inflation affects not only your savings but also your everyday expenses. Regularly reviewing your budget and making necessary adjustments can help you manage rising costs. Consider cutting back on non-essential spending and redirecting those funds into savings or investments that are better positioned to keep pace with inflation.
