How Inflation Affects your Savings and What to Do About It
How Inflation Affects your Savings and What to Do About It
When it comes to savings, there’s nothing worse than the idea that all your hard-earned money could lose its value. With inflation, this concern is a very real concept that many struggle to find a solution to. However, there are plenty of methods you can use to overcome inflation and save for a comfortable future.
At Hansford Bell, we help our clients to find the investment and savings strategies that work for them, building their understanding of the options and finding the right path that aligns with their goals. In this article, we'll discuss how inflation impacts your savings and offer strategies to counter it.
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What is Inflation?
Inflation is defined as the increase in cost for goods and services, measured as a rate of change – hence, rate of inflation. Over time, prices will generally trend upwards, although deflation is also possible. When there is inflation, money will have less buying power, so you may need more of it to keep up with the change.
Why Does Inflation Change?
Inflation is caused by various factors like production costs, supply and demand, monetary policies, and market conditions. These factors form a complicated mesh of circumstances that make changes in inflation hard to predict. One good measure of inflation is the banks and their interest rates, which will generally change in accordance with large-scale fluctuations in inflation.
What does this mean for you? It means that while inflation is outside of your control, the methods of dealing with it are very much in your hands.
The Real Cost of Inflation
Inflation can erode the value of your savings over time, but it’s not like it will directly detract from the overall number. In fact, depending on your savings plan, you’re still likely to see that number grow. So how does it make your money worth less?
The real cost of inflation comes from the depreciation in the value of currency. As inflation causes prices to rise, the purchasing power of the pound becomes less. A loaf of bread that costs £1 one year might cost £1.05 the next with a 5% inflation rate. As the years go on, this value can drastically increase, resulting in a price landscape that’s far removed from the one when you made and saved your money.
If the rates on your savings doesn’t exceed, or at least meet, inflation, then the value of your savings will have depreciated compared to their value when you saved them.
This impact can be felt across almost all your assets and savings. From property and mortgages to ISAs, standard savings accounts, and bonds, you’re likely to see some fluctuation in the value of your investments versus the rate of inflation. To protect yourself and your finances against forces outside your control, you need a robust strategy in place.
Strategies to Protect Your Savings from Inflation
There are lots of ways you can invest your money, each with their own particulars to be aware of. Ahead, we'll give you a rundown of some popular investment strategies that defend against or overcome inflation, with a few examples of investment types to get you going.
Diversifying Your Investment Portfolio
Investing in various options can give you a lot of financial freedom. Diversifying your investment portfolio means putting money in lots of different types of investments and savings accounts. Here's a list of potential options:
- Stocks
- Bonds
- Property
- Pension funds
- ISAs
Maintaining a wide range of investments in your portfolio can keep you safe, even as inflation fluctuates. While it can be best if all your investments outweigh inflation, other investments still offer improvements to your financial resilience. If one investment falls through, you'll still have others to tide you over.
Remember that without investing in anything, the value of your money won't increase at all. So consider the options, and find the path you're most comfortable with. You can get help with your investments by contacting a financial advisor.
High-Interest Savings Accounts
With high-interest savings accounts, the interest you accrue will generally outstrip inflation. As it will likely be compound interest, your savings can grow exponentially, resulting in a far greater increase over time. When held against inflation that is often kept in check, this can mean a nice amount of savings you can rely on.
However, there are some things you need to consider. Firstly, this is generally regarded as a long-term investment option that may take upwards of five years. Second, high-interest savings accounts can be high-risk, high-reward – you're not guaranteed the same amount back that you put in.
Despite this, there are many options for high-interest savings accounts that are generally stable and offer good returns in the long run, making this a mainstay method for fending off the impacts of inflation.
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Interest-Linked Bonds
Tied to a specific benchmark or index, interest-linked bonds offer protection against fluctuations in inflation. As their savings parameters aren't fixed, you're more likely to experience volatility, which can be both good and bad depending on market conditions and your savings goals. However, they can still prove a valuable investment option.
Regular Financial Reviews
Most important when it comes to your finances is to regularly review your investments, and make sure you're on track towards your goals. It can be easy to be sidetracked and forget your original purpose for investing.
Regular financial reviews offer insight into your current savings and what opportunities there are for growth. They help you show what's working, what isn't, and where you are compared to where you want to be.
Working with a financial advisor is the best way to conduct these reviews, as they will be able to provide context on your financial growth and offer potential options for future investment. They'll also be able to conduct these reviews more frequently, better maintaining your finances.
Find out how a financial life plan keeps your savings on track >
How Hansford Bell Can Help Inflation-Proof Your Savings Plan
Now that you know what strategies are available, and why inflation is a very real threat to your finances, your next step is to speak to a trusted advisor. At Hansford Bell, we provide valued financial consulting to our clients, helping you to find an investment plan you feel comfortable with and that suits your end goal.
If you're interested in fighting back against inflation and growing your finances, get in touch with our team! Otherwise, find out more about your finances with some related articles below.
Learn how much money you need for retirement >
Invest smarter with our beginner's guide to investments >
Disclaimer: This article is for informational purposes only and does not constitute advice. Your finances are at risk when you invest.
Hansford Bell Financial Planning Ltd is Authorised and Regulated by the Financial Conduct Authority: number 482388.
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