Why you’re losing money on your savings
Most of London seems to be barely paying its extortionate rent, letting alone saving any money. However, for those who have worked hard enough to fill a savings account, your work is not yet done. Unless you’re investing your money, those savings are getting smaller due to inflation.
Why is inflation stealing your money? While it has its bad side, the macroeconomic phenomenon is actually a sign of a healthy economy. It occurs when demand for goods and services increases to the point that those goods and services become more expensive. As those goods and services become more expensive, companies can make more money, which should contribute to higher salaries for all of us workers. When people have higher salaries, they can usually buy more stuff, which increases demand, bringing us back to the beginning of the inflation cycle.
Inflation is such a good measure of the health of the economy that most governments have a target for it. The UK’s is currently set at 2%. Inflation is measured by tracking the rate of change of a variety of household goods and services such as childcare and bread. Inflation indexes adjust according to what households are currently buying. For example, computers were obviously not part of the index before they were invented but are now factored in due to their importance to our everyday lives. Other items measured include package holidays and computer games as well as the cost of water, gas and energy.
When inflation is too low, it means the economy isn’t growing fast enough, sometimes indicating a recession. High inflation means the value of our currency will decrease. For example, after WWI, Germany began printing money to pay off its war debts to the allies. As a result, inflation became so high and the currency lost so much value that it was cheaper to burn German paper money rather than fuel or wood.
So, what does all this mean for your savings? As inflation increases, the cost of £1, in terms of what you can actually buy with it, changes. If inflation was at 10%, about where it currently is in Turkey, then if a loaf of bread cost £1 last year, it would cost £1.10 today.
This essentially means that while you only needed £100 for your monthly shop last year, you’ll need £110 for your monthly shop today. So if you’ve saved £100 you would only be able to buy £90 worth of stuff next year with it, though it would still look like there was £100 in your bank account.
The way to combat this is through investing. If you’re letting your savings sit in a normal bank in a normal chequing account, you’re literally losing that money, despite your best efforts. Luckily, we’re only at 1.8% in the UK today. However, a standard savings bank account in the UK only offers interest rates of 0.01%-0.1%, which means savers are still not beating inflation.
The average saver has loads of options as to how to make sure their money isn’t being devalued. Try switching to a different bank that offers a better interest rate or see if your own bank can offer you a different savings account with a better rate. There are ISAs, which offer impressive interest rates or you can use an app like Nutmeg, Wealthify or Moneybox to invest your savings in stocks and shares, though these are a bit riskier than finding a strong savings account.
If you have money in the bank, look into your options as there’s a whole world of investment opportunity out there. The important thing is that you don’t just let your money sit idle, wasting away. Make it work for you!
Words by Katharine Hidalgo
Sketches by Nike Akinfenwa
