Don’t allow your savings to be eroded by inflation

May 27, 2011   //   by sam   //   Banking and Savings Accounts  //  Comments Off on Don’t allow your savings to be eroded by inflation

Piggy_Bank_And_HouseAfter the recession brought big concerns to the safety of our money, the government increased the amount of cover individuals were given in order to restore some confidence in savers.

But nowadays there’s a much more obscure danger that our savings face, with the value of our funds falling from under our very noses.

With the lowest interest rates on record and an unusually high rate of inflation, savers are struggling to stop their funds from losing value. Inflation measures the rate at which the cost of things is increasing, and therefore if you fail to get a higher savings rate than the current inflation rate, your money won’t be worth as much in years to come.

For example, the current inflation rate in the UK is 4.5%, which means that something that cost you £100 last year, will cost you £104.50 today, so if your savings rate is below 4.5% your savings will be worth less next year.

Another thing to keep in mind when finding the most profitable method of storing your finances is that earnings from any standard savings account are subject to income tax, so taking this into consideration, you will actually need to keep your interest rate above the inflation rate by your income tax rate (up to 50% depending on your salary).

One way to avoid paying tax on your returns is through Individual Savings Accounts (ISAs). These special accounts allow you to save and invest up to £10,680 every year while paying nothing to the tax man. Up to half of your allowance can be put into a cash ISA while the rest can be invested into Stocks & Shares ISAs (or up to the full amount into investment ISAs), allowing investors to earn tax free returns on their investments.

Another way to keep your interest rates as high as possible is by use of fixed rate bonds. These accounts require you to lock your money away for an agreed period of time, offering you a rate that is fixed until the bond matures.

This type of account offers a very low risk investment – since the only money you’re putting on the line is the interest. In most cases, the longer the term, the better the rate offered. However it may not be a good idea to go for anything longer than a couple of years, as rates have bottomed out so can only really go up.

Share dealing accounts are another avenue to explore, especially by those that are keen to boost their returns by upping the game and adding an element of risk.

These investment accounts are offered by a number of high street banks. Your money is invested in several places that have been identified as ‘a safe bet’ by the experts, so although there is the possibility that you could lose money, there is also a greater chance of increasing your returns.

The great thing about most share dealing accounts is that they allow you to tie in your ISA allowance, which means that you can potentially invest up to £10,680 per year and pay nothing in tax on your returns.

Whatever you decide with your savings, remember to keep your returns as close to or above the rate of inflation.

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