Interest rates are finally rising for savers, but inflation can still reduce value in real terms

31 Oct 2022

Interest rates are finally rising for savers, but inflation can still reduce value in real terms

A woman placing money in a piggy bank.

As interest rates start to rise for the first time in more than a decade, a report suggests that savers are pulling their money out of investments in favour of cash accounts. But while the interest rate may be higher now, inflation can still reduce the value of your savings in real terms. Find out why here.

In response to high inflation, the Bank of England (BoE) has increased its base interest rate several times this year. In November 2022, it increased to 3%.

For savers, that can seem like good news. For the first time since the 2008 financial crisis, the interest you can earn on your savings is rising from historic lows. 

Yet, inflation is also much higher. In the 12 months to October 2022, the rate of inflation was 11.1%.

As the cost of living rises, the goods and services that you can buy with your savings will gradually fall. So, while the figure in your savings account will grow thanks to interest, in real terms, it’s likely to be falling in value.

Just to maintain the value of your savings, the interest rate would need to match inflation. Unfortunately, despite interest rates rising, there’s still a significant gap.

In fact, the high inflation rate could mean your savings are falling in value faster in real terms than they were previously. 

Investors pulled £115 million out of UK equities during a single week in September

Even though inflation could reduce the value of your savings in real terms, figures suggest that some savers are withdrawing money from investments to place in savings accounts. 

According to a report in iNews, investors pulled £115 million out of UK equities between 23 and 28 September 2022. They also withdrew £453 million from US stocks and £6.5 million from US, UK and EU bonds. 

After recent market volatility due to economic uncertainty, a cash account may seem like the “safe” option. However, if you want to maintain or grow your wealth, investing could make sense.

While all investments are exposed to risk and could fall in value, historically, markets have delivered returns that outpace inflation over the long term. By withdrawing money from investments, you could be missing out on potential growth.

While investing could help you to make the most of your money, it isn’t the right option in every situation. You should consider your goals and financial resilience first. 

3 signs that investing could be the right choice for you

1. You have an emergency fund

Investing should involve a long-term strategy, so you should ensure your finances are in good order before you start. This includes having a financial safety net to fall back on if you need it.

Ideally, you should have between three to six months of expenses in an easily accessible cash account. This can provide you with security if you need to pay unexpected costs or your income stops. Having this safety net in place means you won’t need to withdraw investments to cover short-term costs.

2. You’re saving for the long term

Volatility is part of investing and it’s likely the value of your investments will fall at times. However, when you view returns across a long-term time frame, the peaks and troughs have historically smoothed out.

This is why a long-term goal is important when investing – it’s often recommended that you remain invested for at least five years.

So, if you’re saving for goals like retirement, helping children eventually buy their own home, or to leave a legacy, investing could help your money go further.

3. You understand investment risk and your risk profile

All investments have some risk, and it’s important you understand what an appropriate level for you is.

Understanding your risk profile can help you build a portfolio that reflects your goals, circumstances, and general attitude to risk. Taking too much or too little risk could harm your financial security or mean you don’t reach your goals. If you have any questions about risk and what investment opportunities are appropriate for you, please contact us.

Do you have questions about investing?

If you already have an investment portfolio and have questions about whether it’s still suitable for your goals, please contact us. We can work with you to create a long-term investment strategy that reflects your aspirations.

We can also provide support if you think investing could be right for you but aren’t sure where to start. We can help you understand the different options and how to get the most out of your money. Please get in touch to arrange a meeting. 

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.



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