Inflation! You hear this word all the time on the news, and like many millions of people instantly find something, often almost anything more interesting to do than look into it. However, it’s worth paying attention to the news, by taking the time to understand the effects that inflation has on your savings.
So what is inflation?
Inflation is the rate of increase in prices for goods and services. Researchers look at the costs of hundreds of things we regularly spend money on, including bread, fuel, cinema tickets, and pints of beer – and tracks how these prices have changed over time.
Inflation rates are expressed as percentages. If inflation is 1%, this means that on average, the price of goods and services you buy is 1% higher than it was a year earlier. Or, in other words, you’ll need to spend 1% more to buy the same things you bought 12 months ago.
Why should you care?
Inflation has a significant impact on your savings. To be able to have the same lifestyle you have now, your income and savings have to keep in line with inflation. If you want to retire on an income £45,000 per year, then in 30 years, you may need something approaching £90,000 to enjoy the same standard of living that £45,000 will buy you now. Scary!
Inflation is rising in the UK. The Consumer Prices Index 12-month inflation rate hit 2.7% in August 2017, up from 2.6% in July 2017. Interest rates are at 0.75%, and the pound is weak, as Brexit worries continue.
So, unless your savings are achieving a higher interest rate than the rate of inflation then in real terms your savings are gradually being eroded!
What about my Cash ISA?
The Financial Conduct Authority’s ‘Sunlight Data’ recently named and shamed the worst high street interest rates, with some Cash ISA rates as little as 0.01%!
So, what’s the opposite of saving money? Yes, you’ve guessed it – Losing money. That’s effectively what you’re doing year-after-year if you choose to ignore the rate of inflation and leave your cash savings languishing in some of the many 0.1% to 0.5% Cash ISA accounts!
What is the alternative?
A Stocks and Shares ISA could be the best saving vehicle for you. And if you’re highly selective in your investment approach, it is possible to beat both Cash ISA Rates and the high current inflation rate many times over.