Following current events in the news recently, I
happened to be following coverage of the uncertain events occurring in Zimbabwe at the
moment. Now what has this got to do with us, so many miles away in the UK you might
ask? Well quite a bit actually, albeit in a somewhat tangential way. The major
section of the Zimbabwe
story that caught my attention was the mention that the country has the highest
rate of inflation in the world; inflation there runs at some 165,000%.
At a rate of 165,000% a loaf of bread that cost £1 one
day would cost a staggering £452 the next…you can see the deleterious effects
of inflation on the average person…but what has this got to do with us in the
UK?
Ok…well inflation is actually a hidden menace in
almost every country including our own and it is effects, although more subtle
than those occurring in Zimbabwe,
are happening right here right now and gradually reducing the value of any
money that you have saved, by the day. Now the reason that inflation is not
always apparent in the UK
is that we currently use the CPI measure which, because it omits certain
important components such as mortgage payments from its comparisons, tends to
display a much lower official inflation figure than is in fact the case. Using
the more accurate RPI measure gives a higher inflation indication and is a
truer reflection of the state of inflation in the UK.
But what has it got to do with us?
Ok…for those that haven’t made the connection as yet,
here it is…Unless you take steps to put your hard earned cash into an account
that gives you a rate of interest that equals or beats inflation, the value of
your savings is diminishing every day. Here is a factual but shocking
example…if you had £1,000 and you took no action to protect it from inflation,
at a rate of just 7% inflation, your savings would be halved in value in just 7
years!
The time to take action is right now!
The first thing to do is to check how much interest
you are currently getting on your savings. This will in all likelihood be quite
a sobering experience as many people tend to just leave their savings where
they are without making regular checks on what rate of interest they are
receiving. In fairness the large institutions tend to get away with paying low
rates by making it incumbent upon savers to check interest rates on savings on
their websites or in branches; thus, in all likelihood you will probably find
that the interest that you are currently receiving on your savings has fallen
well below the best rates available.
So how do you get the best rates? Here are some
pointers that our readers have consistently found to hold true.
- As always, shop around and compare rates of interest on several
different savings accounts.
- It is often found that the very best rates of interest on savings
are offered to savers who can commit to keeping their money with an
institution for a fixed period; these can range from 6 months to 3 years,
although as a general rule it is not best practice to commit to any longer
than 1 year as you cannot predict whether the interest rate that you are
offered now will still be competitive that far in the future.
- At the time of writing, it has been observed that some of the best
rates of interest for savers, who cannot commit to putting their money
away for fixed periods, are offered by branches of foreign banks that are
trying to gain a competitive foothold within the UK market.
Do not let the fact that the bank is foreign or that it has an unfamiliar
name put you off…as long as they are part of the FSCS (Financial Services
Compensation Scheme) and any bank operating within the UK must be by law,
then your money up to a certain level, is completely safe. This level
sometimes changes so check on the FSCS website for the appropriate rate at
the time.
- It is worth considering cash ISA’s as a safe home for your money;
the rate of interest that you receive on your savings is not always the
best around but it is tax free and depending upon your tax situation,
might be a good option. Watch out for minimum deposit periods and penalty
clauses.
- Once again, depending upon your situation, it might be worth
considering putting your savings into inflation proof Government National
Savings Certificates. These do not offer a rate of interest on your
savings as such, but they promise to beat inflation by giving you a rate
of interest to match the RPI plus a bonus (usually < 1%) on top. These
products are exempt from tax but the minimum lock in period is usually 3 –
5 years and so they may not be suitable for everyone.
So there you are, you now know the consequences of not
making your money work hard for you, so get yourself out there, get yourself a
great rate of interest on your savings and don’t let inflation take away what
you’ve worked so hard for!
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Dow Jones