Inflation is eroding your savings, but by how much?

On average, UK prices rose by 9% (CPI) in the year leading up to April 2022, sparking concerns for almost 9 million savers in Britain who could be holding too much cash. In times gone by, cash has been viewed as a safe haven, acting as a way to avoid the risk of losing money through investing in volatile markets. Today, with inflation reaching heights not seen since the 1980s, holding excess savings in cash presents a risk of losing money in real terms.

Simply put, inflation is the rate at which the price of goods and services increase over a period of time. The Bank of England aims to keep inflation at around 2%, so a basket of shopping that cost £100 a year ago, would now cost £102. In other words, your money is worth less today, than it was a year ago. This is referred to as a loss of purchasing power and becomes more extreme during times of high inflation, as we are experiencing now.

Why am I losing money if I am saving into a savings account?

Interest rates are an important tool, used by the Bank of England to control inflation, and historically they have determined a benchmark at which returns can be achieved through holding your money in cash. The last time prices were rising as fast as they are now, was in 1982. Understandably, times were very different then with unemployment reaching the highest levels seen in 50 years and interest rates reaching heights of 14%, falling to 10% by the end of that year, this provided cash savers with the reassurance that their wealth wasn’t being eroded by the negative impact of inflation.

By comparison, the Bank of England Base Rate is currently set at 1% and although it is anticipated by many that we will see further increases in the near future, it is difficult to know what these changes will be and whether these increases will be passed onto savers. Certainly, what we do know is that many providers, including the high street banks, have yet to or barely increased the rates on their savings, even after several base rate changes, and the high street is still paying as little as 0.01% to savers, or not much more than that.

While interest rates remain so far behind the rate of inflation, and most savers being paid substantially less than the base rate, the purchasing power of savers is being eroded at a rate not seen before and with the Bank of England anticipating that inflation will peak at more than 10% this year, the situation may still worsen  and could impact the financial aspirations for millions of Britons. 

Understand what Inflation means for your cash savings

To help you assess the true impact that high inflation can have, Investment Champion has developed a tool to provide a tailored picture of what this means for you and your cash savings. 

Our new Inflation Calculator allows you to input your current level of cash savings, combined with the interest rate you are currently earning and the rate of inflation to show exactly what you can expect your money to be worth in the future. 

For example, if you hold a deposit of £20,000 in a savings account earning 1%, after 5 years with an average inflation rate of 7%, the real value of your money will have fallen to £14,987 – meaning the loss of your spending power due to the erosion of inflation is £6,033. 

If this rate of inflation continues over the next 10 years, your spending power will have reduced by almost £11,000.

Try out our Inflation Calculator now to see how inflation might affect your savings.

Balancing the need for cash with longer term growth

Of course, cash is always going to be an important element of all financial plans, in order to maintain required spending and protect against any ‘emergency expenses’. However, the FCA have recently released a report highlighting the risks of holding too much money in cash, especially when there are no immediate needs for these funds and when more risk could be taken to mitigate the impact of inflation over the longer term.

Katie Smith, Head of Pensions at Aegon recently spoke to FT Adviser and said “Far too many people miss out on the returns offered by investing sensibly for the long-term with the natural instinct of loss aversion proving a real barrier. However, the reality is that having all your savings in cash carries its own risks as we’ve seen with inflation figures”. You can read more about this here.

The amount of cash needed can vary depending on your circumstances, expenses and financial goals. It is important that you take time to understand your current financial position and what you want to achieve before deciding how much you can afford to invest, and how much risk you are comfortable taking.

It is also important to remember that markets can go down as well as up and investments should be held for at least 5 years in order to balance the natural fluctuations that occur. The risk that you could get back less than you invested increases if you hold your investment for a shorter time period. 

How can Investment Champion Help?

Whether you are new to investing, or have substantial experience, Investment Champion can support you in finding an investment solution that is well suited to your needs, both in terms of your attitude to risk (from cautious to adventurous), and how you wish for your money to be invested. With options available for investors interested in ESG (environmental, social and governance) portfolios. 

Our aim is to make investing feel as simple and straight forward as possible. We work alongside a team of investment experts, responsible for managing over £2 billion worth of assets, invested for over 3,000 clients, with a combined 43 years of experience, so that you can feel confident that the right investment decisions are being made on your behalf.

Why not get in touch to learn more or simply get started with investing and see how investment champion can support you through your investment journey.

Note: The value of investments can fall as well as rise. You may not get back what you invest.