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In this guide, we explain what inflation is and how it can impact your savings. Plus, we offer practical tips on how you can protect your savings from inflation, giving you more financial security in uncertain times.
Inflation is the rate at which the general level of prices for goods and services rises over time, resulting in a decrease in the purchasing power of money. It is typically measured by tracking price changes in a basket of goods and services, such as food, housing and transportation.
Example: If inflation goes up by 5% in a year, something that costs £10 in January might cost around £10.50 by December.
It’s something that’s always happening, so the overall cost of living is higher now than it used to be. For example, the price of a white sliced loaf in 2004 was 64p, and in 2024, it has risen to £1.40. This is called the “purchasing power” of money.
There are several things you can do to protect your savings from inflation and stop it from having such a big impact:
Leaving money in a current account that earns little or no interest can result in the gradual erosion of its value due to inflation. While current accounts are convenient for day-to-day transactions, they are not effective for growing wealth or preserving the real value of savings. Additionally, money left idle in such accounts misses out on opportunities to earn higher returns through savings accounts with better interest rates.
It goes without saying, but shopping around and finding savings accounts with the highest interest rates possible will help protect your savings from inflation. Go beyond just looking at familiar high street banks – look at all available providers and compare rates easily online. The savings market has evolved from being dominated by high street banks to a diverse landscape with digital banks and increased competition, offering a wider range of rates and options for savers.
There are a range of options available, including easy-access savings accounts and Cash ISAs.
A fixed-rate savings account is another option besides a regular easy-access savings account. With this type of account, you need to keep your money in it for a set period. At Saga, we offer a range of options, including 1-month to 7-year accounts provided by Flagstone. Because you agree not to touch your money during this time, you usually get a higher interest rate, which stays the same for the whole term. This can give you a better chance of beating inflation.
Before you choose this, make sure you won't need the money during that period. If you can't afford to be without it, this might not be the best choice for you.
Make sure you understand how investing works and the risks involved. With a stocks and shares ISA, you can pick from three ready-made investment portfolios, each portfolio comes with a different investment objective and level of risk. Keep in mind, there's no guarantee you'll make a profit, and your capital is at risk. Plus, you can invest up to £20,000 a year tax-free across all ISAs.
If you have some money you won't need for a while, think about putting it into an investment account like a stocks and shares ISA. Investing has been proven to outperform cash and inflation. Investing has been proven to outperform cash and inflation over the longer term.
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