With inflation your savings are worth less each year.
Not good news. Why does this happen?
Inflation is when the cost of things goes up, do you remember when a bottle of Oyster Bay was £7 (it’s now £10) or Chomp bars were 10p (now 15p). These changes are monitored closely by the Office of National Statistics. Each month they release a figure called the Consumer Price Index or CPI which shows us how much prices have changed. They look the prices of hundreds of daily-life goods and services, think: fruit & veg, bread, petrol, clothes, ... If the index is up it means, on average, these items have become more expensive over the last year.
What about my savings?
The spending power of your savings is declining with time because life is getting more expensive. In other words, the money you have saved could have bought you more a year ago.
Wait, how do I stop this?
The only way to fight inflation is to counter-balance by growing your savings at the same rate as inflation, or more. This could be achieved through earning interest or income on your savings or growth from investments. The UK’s inflation is currently at 2.3% year-on-year so you need to be earning more to win this battle.
Saving accounts aren’t paying that much interest! The best 1-year fixed account is paying around 2.0% and most savers are getting less because they don’t shop around.
What can you do?
You need to 'manage your money'. Look at your savings and divide them into different pots: Quick access rainy day fund, savings for a future big spends (think: house, wedding, baby fund, ...), money for investing,... Then find the best place for each of these. Put a time scale on your big spends - If you are planning in buying a property in 2-years you know you can lock these savings away and take advantage of higher interest rates offered on fixed term accounts.
If you have surplus cash after your near-term saving targets are covered, it’s good to start investing. This is because it gives your money an opportunity to grow at a faster rate. And, we’re not talking about throwing it all into the stock market! Investing can be low to high risk depending on the products you choose.
First check you are contributing enough to your pension because the income tax saving is unbelievably good! You could consider lending your money in return for interest via peer-to-peer lending or through buying bonds. It’s important to diversify, aka invest in lots of different things. If that sounds like way to much DIY, then buy into a fund which will do the diversifying for you. You can choose from low to high risk funds, ethical funds, UK funds only, ... We have a guide for that.