Are your savings working hard enough?
In 25 years your cash could have lost almost half its value due to inflation. And yet many people still have their savings in cash ISAs or sitting in the bank. There’s usually something comforting about having money in the bank but the likelihood is it might not be doing you any favours.
It’s always important to have money available for the unexpected things. A good rule of thumb is to have a minimum of three months essential outgoings readily available. But if you have more than that, are you missing out?
The impact of inflation on your savings
Put simply inflation is the rising cost of goods and service that you buy. If Inflation is rising it means you can buy less with your money. You just need to look at the current energy crisis to see the effects of inflation.
Let’s say inflation is 2.5% each year, the purchasing power of £10,000 today would be worth £5,394 in 25 years, so just over half. This examples assumes inflation doesn’t change and the money has not grown over time. Now bear in mind that inflation is currently sitting at *5.5%.
Combining inflation with low interest rates is not good news.
Interest rates have been fairly low for many years now. If inflation is rising and your money is earning very little or no interest, it’s effectively doing nothing. Actually it is probably doing ‘worse’ than nothing and losing value.
Why are we ok losing money to inflation, but the thought of investing scares many of us into not even considering it?
Is it because we hear about inflation all the time, on the news, in the press and it is an ‘every day word’ where as ‘investing ‘ isn’t to a lot of people? There are probably many reason but like everything, the more you know about it the better informed your decision are.
Yes investing has potential risks and you could lose money. But it also has the opportunity to grow your money and make it work harder. Inflation eats away at the value of your money without the opportunity for growth. So isn’t it at least worth considering?
But remember past performance is not a guide to the future and the value of any investment can go down as well as up and you could get back less than you put it in.
*Source ONS, January 2022