How inflation eats away at your savings and how to beat it

When thinking about our savings, we normally like to think of our pot increasing. This could be by contributing more or through the interest we’re earning on what we already have.

But there’s something lurking in the background that could be reducing the value of your cash – inflation.

Inflation measures the change in the value of money over time. There’s a couple of different measures in the UK but Consumer Price Inflation (CPI) is the most commonly quoted.

CPI looks at price changes of a basket of over 700 goods and services, such as transport, food and clothing. It’s used to see how the cost of living changes and currently stands at 1.3%, meaning a basket of goods costing £100 a year ago would cost £101.30 today.

Inflation isn’t necessarily a bad thing and a small amount is healthy for an economy. The government has set a target of 2%.

It’s important to take this into account when thinking about your savings, because unless your interest rate is more than the current inflation figure, your money is losing value in real terms.

Why loyalty doesn’t always reward you

This creates a problem for many people who have not checked or changed their saving account for a long time. They may have been enticed with an introductory bonus rate long ago, but in many cases that rate has now dropped and their hard-earned cash is left in accounts paying next to nothing.

In fact, the average instant access savings account pays just 0.41%, but it’s often less. On a savings pot of £10,000 you’re earning £41 in interest per year, but after inflation (currently running at 1.3%), your cash is actually worth £89 less in real terms after just one year.

Fix for inflation-beating returns

You can shop around for a better instant access rate, up to 1.40% (expected profit rate*) currently in the market. This will help fight inflation but better rates are available if you’re prepared to look at fixed term savings.

Unlike instant access, fixed term accounts usually only allow access to your money after the maturity date. But they can provide much better returns, and you don’t need to lock your money away for long to see an improvement on instant access rates. For example you can currently get an inflation-beating rate of 1.50% (AER/Gross*) for a 6-month fix through Active Savings. This rises to 1.80% (expected profit rate*) for a 1-year fix if you deposit £1,000 or more.

Financial planners usually suggest we should keep three to six months’ worth of expenses in instant access accounts, in case of emergencies as well as for any short term goals. But for anything more, fixed term savings could really boost your cash.

How to keep your cash as busy as you are

You may think it’s a lot of effort to chase the best interest rates in the market, especially if this means saving across multiple banks and building societies. New application forms and having to prove your identity each time. It can be exhausting. And people can be nervous about moving their cash savings to a new provider.

But Active Savings makes it easy. It lets you pick and mix easy access and fixed term savings from a range of banking partners, all through one online account. You can find some of the most competitive savings rates in the market and there’s currently 15 savings products which match or beat inflation. Please bear in mind this may change if inflation rates change in the future.

Once you’re set up you can move your money around with just a few clicks. No forms, no paperwork and no hidden surprises.

All of our banking partners are covered by the Financial Services Compensation Scheme (FSCS). This means eligible deposits are covered up to £85,000 per banking licence. Read more about the FSCS cover.

Let Active Savings help you fight inflation and make more of your money in 2020.

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This article is not personal advice. If you’re unsure if a savings product is right for you, please seek advice. Rates quoted are correct as at 16 January, and they may be added or withdrawn at any time.

*AER (Annual Equivalent Rate) shows what the interest rate would be if interest was paid and compounded once each year. It helps you compare the interest rates on different savings products.

Gross means the interest rate without any tax deducted. Interest is paid gross. You are responsible for paying any tax due on interest that exceeds your Personal Savings Allowance to HM Revenue & Customs.

Expected profit rate – Islamic banks offer an expected profit rate, rather than interest on their savings products, in order to comply with Sharia banking principles.

This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorised and regulated by the Financial Conduct Authority with firm reference 115248. The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017 with firm reference 751996 for the provision of payment services. Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).