Top of main content

Inflation's eating your savings – what can you do about it?

If you’re a diligent saver, you want to feel financially protected against an uncertain future.

Yet despite recent interest rate rises, high inflation continues to create economic uncertainty.

So, what is inflation, and what can you do to reduce its impact on your money?

What is inflation?

Inflation is the increase in the price of something over time. For example, you may have noticed your weekly shop has gone up and it costs you more to fill your car.

In the 12 months to January 2024, inflation rose by 4.2% according to the Office for National Statistics. That means something that cost £1 a year earlier may now cost you £1.04 or more. When you add it up, it amounts to a significant rise in everyday living costs.

The rise in inflation has been driven by a number of things – from increased demand for goods and services to global events contributing to supply issues and the higher price of oil and gas.

How does inflation affect your savings?

Since 2022, interest rates have been rising on savings accounts. However, inflation remains relatively high. This means your savings are still at risk of losing value in ‘real’ terms as you’ll be able to buy less with your money.

Let's say inflation averages 6% over the next year. That means what costs you £1,000 today would cost you £1,060 in 2025.

If you put £1,000 in an easy-access savings account today paying 4% interest, you’ll earn £1,040 interest over the same period. So, you'd effectively lose £20.

So, what can you do to reduce its impact on your money?

Wait while interest rates are high

Interest rates are set by the Bank of England (BoE) to help steady the economy and control inflation. When interest rates go up, the BoE tries to bring inflation back down to a target of 2%.

While this may have a positive effect on your savings, it also means the cost of borrowing on credit cards, loans or mortgages may go up. It’s a delicate balancing act to keep the economy growing and inflation under control.

Explore: Why do interest rates change?

For savers, the benefits of any rise in interest rates could be marginal. When inflation is taken into account, it may take a long time for rising interest rates to offer any real ‘bang for your buck’ on savings accounts.

Consider investing some of your cash

Investing your money over the medium to long term could give it a chance to potentially grow. That’s because investments – such as funds, shares, bonds, and other assets – could increase in value over time compared to simply keeping your money in a savings account.

However, there are no guarantees, and you could get back less than you invest. Ideally, you should be prepared to invest for at least 5 years to give your money a chance to recover from any short-term dips in the market. 

Investment calculator

To see how much your money could be worth in years to come, try our investment calculator.

If you’re considering investing, it may be easier than you think. 

Funds, for example, can be an effective way to spread your risk. Funds are ready-made baskets of investments that save you from having to choose individual investments, such as shares in specific companies.

You simply choose the level of risk you’re comfortable with and set the amount you want to invest each month. The fund will then be managed for you. With HSBC, you can invest from £50. Fees and eligibility criteria apply.

Just be prepared for the value of your investment to jump around. And remember that any investment can fall in value, as well as rise – so you may get back less than you invest. 

Explore: Understanding market volatility

Is investing right for you?

It’s good to have an emergency fund of between 3 to 6 months' expenses saved and easily accessible before you start investing. This way, if you get hit with any unexpected costs, you won’t have to dip into your investment to cover them.

If you’re trying to decide between saving and investing, think about what you’re saving for. Is it something specific, like a house deposit, a new car, or a holiday?

If you think you’ll need the money within 5 years, a savings account may still be the best option because you’ll know that – inflation aside – the value of your money can’t fall. 

If you don’t think you’ll need to access your money for at least 5 years – whether you’re saving for something specific like children’s school feesretirement, or just to have more options with your finances – it might be worth considering investing.

Key takeaway

If you already have an emergency fund and are comfortable taking some risk, investing your money could give it a chance to grow over the long term.

This article was last updated: 20/05/2024, 11:00