Inflation has cost savers £113 billion in real terms in the last year

High inflation over the last year has collectively cost savers billions of pounds in real terms, according to an Independent report. Have you considered the effect the rising cost of living could have on your wealth?

While inflation may not reduce how much you have in your savings account, in real terms, the value may fall. 

As the cost of goods and services rises, what you could purchase with your savings falls. Usually, this happens at a gradual pace. However, as inflation has been higher than the Bank of England’s (BoE) 2% target for two years, the effect has been more noticeable. 

If the interest rate your savings earn doesn’t keep pace with inflation, the value of your money decreases.

Inflation could reduce the value of your savings in real terms, but cash may still be useful

The BoE calculations suggest £10,000 in 2021 would have to have grown to £11,774 in August 2023 just to have the same spending power. So, your savings would need to have earned £1,774 in interest during that time.

Even though interest rates have started to rise as the BoE has increased its base rate to tackle high inflation, it’s unlikely your savings have grown at the same pace. 

The analysis published in the Independent suggests up to £113 billion has been wiped off the value of savings in the last year in real terms. 

While the value of your money may fall in real terms in a savings or current account, there are still times when they might be the right option for you, including these three:

• Handling your day-to-day finances: If you’re using money held in your account to pay for utility bills or other regular expenses, inflation will have little effect. 
• Saving for short-term goals: Investing could make sense when you’re saving for a long-term goal. However, if you’ll be saving over a shorter period, volatility might mean investing isn’t the right option. So, when you’re saving for a holiday next year or home improvements for example, a cash account could be right for you. 
• Creating an emergency fund: While you may not want to access your emergency fund now, you want to be able to easily make a withdrawal if the unexpected happens. As a result, a cash savings account could make sense. 

So, it’s important to set out what you want to use your money for. It can help you select an appropriate place for your wealth that aligns with your goals. 

Inflation is starting to fall, which could ease the burden for some savers. However, the value of the money held in a savings account could still fall in real terms. Meanwhile, investing might provide a way to grow your wealth. 

Investment returns may outstrip inflation 

It’s impossible to guarantee investment returns. Yet, investing does present an opportunity to potentially grow your wealth in real terms. 

Historically, markets have delivered returns over long time frames. If you’re saving for a goal that’s more than five years away, from buying a property to retiring, investing might be an option you want to consider. 

Market volatility is a normal part of investing. The value of your investments will rise and fall at different points. So, it’s often not appropriate if you’re investing with a short-term time frame, as a dip in the market could mean you lose money.

If you want to invest, considering risk is important.

All investments carry some risk. However, investment risk varies significantly and you can choose options that are appropriate for you.

There are many factors you may want to weigh up when deciding how much investment risk to take, including the reason you’re investing and the other assets you hold. We can help you create a risk profile and an investment portfolio that reflects your wider financial plan. 

Get in touch to talk about how to make the most of your money

Getting the most out of your money is about understanding your goals and how to use your assets to reach them. If you’d like to talk about your tailored financial plan, including whether investing is right for you, please contact us. 

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.