Inflation – the silent killer of your savings

Savers looking for a safe place for their retirement nest eggs by moving large parts of it into cash are actually exposing it to a significant and ongoing risk that will eat away at its value.

The problem is inflation – the amount by which goods and services increase in cost over time. If your money is not growing, but everything you need to buy is becoming more expensive, your wallet is essentially shrinking.

Before the 2008 global financial crisis, savers hadn’t had to think about the damage wrecked by inflation for years.

High-street bank cash accounts and ultra-safe government bonds could both be expected to give you a healthy 5% return on your money, twice what the rate of inflation had been for the previous decade – savers enjoyed a real return on cash for almost no risk.

When the financial crisis hit, the Bank of England, along with most of the world’s central banks, slashed interest rates, bringing bond and bank account returns well below the rate of inflation, pulling the rug out from under prudent savers.

For the last decade, cash returns have fallen so low that, accounting for the impact of inflation, money in the bank has actually cost you in real terms – and it’s probably much more than you would think.

Inflation in Britain, for example, has averaged 2.7% since 2008. Savers in cash accounts paying virtually no interest (most of them) would have lost around £2,684 in value on every £10,000, Bank of England data reveals.

Most people significantly underestimate the way inflation erodes the real value of their savings. Many don’t even realise it has any effect.

The truth of what savers stand to lose becomes obvious when you look at what your money could have earned elsewhere.

Investors who put £10,000 into fixed-term bonds in October 2008 now have around £12,000 after inflation, based on a return of 3.5% per annum. In a simple “tracker” fund mirroring the FTSE All-Share index they would have made around £4,000 in real terms.

Savers stuck in cash should not expect better news any time soon. Global interest rates are forecast to stay low for another 20 years at least – but the cost of all the goods and services you need to pay for will likely continue to rise.

So what should you do?

Experts recommend holding an emergency cash fund of between three and six months expenditure, but no more than six unless you have substantial ongoing liabilities.

Experts recommend holding an emergency cash fund of between three and six months expenditure, but no more than six unless you have substantial ongoing liabilities.

Investing in bonds may bring down the overall return for your portfolio, but they can offer protection if the stock markets fall. Over the long-term, the stock market could give you higher returns.

Savers becoming investors should spread their money across a few different asset classes and diversify across a few different funds.

Brite Advisors offer a direct savings product whereby you can use some of your savings to invest in the stock market and over time look to beat the depleting effects of inflation.

Contact us today for more information on direct investing.