Inflation could be your savings’ worst enemy. Here are 3 tips to protect your money

By Chancellor

Inflation has been in the news for some time now, after factors like the Ukraine war and the Covid-19 pandemic pushed prices up over the past 18 months.

Indeed, the Office for National Statistics (ONS) reports that inflation rose to 6.8% in the year to July 2023, after peaking at 11.1% in October 2022.

Crucially, when looking at how inflation is affecting your finances now, you could be forgetting to think about how price rises have an impact on your money over time.

The consequences of rising inflation can be seen in research from finder, published in July 2023. The study shows that the average UK savings account lost more than £4,000 in real-terms value between May 2013 and May 2023, due to the effects of rising inflation.

So, read on to find out all you need to know about the impact of inflation on your money.


The rate of inflation reflects how prices rise over time

Among all the media noise, it can be difficult to remember the important basics of inflation – what the rate actually means, and how it broadly affects consumers’ finances.

Here are some key points to remember about inflation.

  • Inflation does not control the cost of goods and services, it reflects it.
  • In 2023, the rate of inflation, reflected by the Consumer Prices Index (CPI), is calculated by the ONS, which assesses the price of 746 goods and services from around the UK. These range from everyday items to luxury purchases.
  • Prices rising steadily over time is normal. In fact, the Bank of England (BoE) has a target inflation rate of 2% a year, which would indicate that GDP and consumer wealth are increasing in line with their expectations. Only when inflation either falls short of, or exceeds, this target, will the BoE begin to take action.
  • Inflation often has an impact on the central interest rate, known as the “base rate”. In line with rising inflation, the BoE has increased the base rate 14 consecutive times since December 2021, bringing it to 5.25% in August 2023. These hikes aim to curb consumer spending and slow the increase in inflation.

One important factor to focus on here is that even if inflation returns to the BoE’s 2% target, prices will still continue to rise over the long term.

For instance, according to the BoE’s inflation calculator, an item costing £10,000 in 2003 would have hypothetically cost £17,408.38 in July 2023. As inflation has risen over the past 20 years, the spending power of your savings has likely been weakened.

Fortunately, there are some steps you can take to combat the effects of inflation on your cash savings.

Although it may not be possible to entirely protect your money from inflation, here are three simple ways to push the needle in the right direction.


3 simple ways to help protect your wealth from inflation

1. Balance your cash savings with an investment portfolio

If you hold most of your wealth in cash, your future financial viability could be put at risk by inflation.

Using the example you read earlier, to buy something with £10,000 in 2003 might cost you £17,408.38 in 2023.

However, if you invested £10,000 today, and saw a medium return of 4.5%, the Aviva investment calculator shows that your money would be worth £20,700 after the same 20-year period.

While many investments carry loss risk, balancing your cash savings with an investment portfolio could help you grow your wealth in line with – or in excess of – the inflation rate over time.

2. Choose a savings account with a high interest rate

While investing is an important strategy for “inflation-proofing” your finances, it is still important to keep some of your wealth in cash. Cash savings can be useful for:

  • Maintaining an emergency fund
  • Extra expenditure, like holidays and annual payments
  • Acting as a buffer if you are between jobs, moving home, or experiencing any other circumstances that might mean your outgoings increase for a short period of time.

So, when you are choosing where to keep your cash savings, finding an account with a high interest rate can be helpful.

In August 2023, according to Moneyfacts, the highest interest rate available on an easy access savings account is 4.8%. This is especially high due to the BoE’s increasing of the base rate over the past 18 months. But even in times of lower interest, finding a competitive rate can help keep inflation worries at bay.

While interest is unlikely to outpace the rate of inflation over the years, it can help supplement your cash savings all the same.

3. Work with a financial adviser

Discussing the effects of inflation over time with a trusted financial adviser can have many benefits.

Firstly, we can use cashflow modelling software to project your potential future wealth circumstances. This programme factors the effects of inflation into your financial plan, so you can prepare for its impact ahead of time.

Secondly, an adviser can discuss investment strategies that suit your appetite for risk and desired time frame, so you can confidently shield your wealth from inflationary conditions in the coming years.


Get in touch

Your wealth is likely to be at risk of losing real-terms value as a result of rising inflation. To discuss your options with an experienced adviser, contact us today.

Email, or call 01204 526 846 to speak to an adviser.

If you’re already a client here at Chancellor, contact your personal financial adviser to discuss any of the content you’ve read in this article.


Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate cashflow planning.