Don't let inflation eat up your savings!
Updated: Dec 2, 2019
Inflation may be defined as an increase in the general price level and a decrease in the purchasing power of money. Have you noticed that you could get more bang for your buck when you were younger? Can you remember the price of a chocolate bar when you a child? £1 in 1900 England for example, would have the equivalent purchasing power as £120 pounds today. Check out this inflation calculator to see for yourself.
Imagine saving £1 under the mattress in 1900. It would have lost over 99 per cent of its value due to inflation over that time period. We, therefore, must take inflation into account when we consider our financial savings.
Banks offer interest on our savings. We need to make sure that the interest rate is above the inflation rate. If the inflation rate is higher than our interest rate (which will always be the case if you receive no interest on your savings), we will in effect be losing money. Inflation has the ability, over time, to cost us dearly.
The Bank of England has attempts to manipulate the inflation rate and has a target of keeping inflation at 2 per cent, meaning that every year, our money will be worth 2 per cent less. The current inflation rate for 2019 in the UK is 1.8 per cent.
Please bear in mind, therefore, that you are only generating value on your savings if the interest rate is above 1.8 per cent (note that the inflation rate will, of course, vary with time).
Be smart with your savings, and don’t let inflation devalue your hard-earned cash.