How to stop your savings being eaten away by inflation

Inflation – or the cost of living – in the UK has risen to its highest level in five-and-a-half years, which means your money won’t buy quite as much as it did before.

It’s reached 3%, which taken over the long-term can make quite a difference to your finances.

For instance, although £1 is still £1, analysis shows that since it was first minted in 1983, the value of a single pound coin has reduced by two-thirds.

That means it will only buy you about 30% of what it could in the early 80s*. To put that into perspective, just imagine being handed a £1 ice cream cone that is two-thirds smaller than you were expecting.

What inflation does to savings

Inflation means the value of your savings might shrink if prices rise faster than your interest rate. It is possible that your money will grow by 3% but the cost of goods and services could increase by 3.5% during the same period. But there are ways to counter that – the first step being to seek expert advice. 

Independent financial adviser Steve Hudson, from our partners Wren Sterling, explains: “If a client had invested £100,000 ten years ago, it would now need to have grown to £132,915 just to have broken even. 

“Any less than this figure would effectively be a loss.” 

Inflation happens either when demand of goods and services exceeds supply pushing the cost up, or when the cost of producing goods or providing services increases, with the increase being passed on to the customer.  

So what might your hard-earned cash have bought you over the years?

The Guardian has worked out that in 2004, a loaf of bread would have cost you 53p (compared with £1 today) – and way back in 1970 you’d have picked one up for just 9p.

A Range Rover could have been yours for £1,998 in 1970, rising to £57,700 in 2004 and £77,000 today. If you’re more of a Mini person, they were only £600 when they first came out, rising to £10,500 in 2004 with the revamped model costing around £20,000 today.

A pint of lager averaged £2.10 in 2004. It’s £3 today, according to but would have been 20p in 1970.

Even a trip for two to the cinema has rocketed, rising from 90p to £9 in 2004 and £22 today.

Fortunately the average weekly wage has also gone up, from £32 in 1970 to £360 in 2004 and £503 today. And latest government figures** show that the total average weekly household spend is around £529, up from about £440 in 2004.

So what can you do to take care of your savings and watch them rise with the cost of living? The answer is to seek financial advice and organise a plan to match your own goals and circumstances. It may involve regular saving in a savings account or stocks and shares investment, depending on what you want to achieve.

Financial adviser Mr Hudson added: “It’s difficult to forecast a specific return on an investment as a potential return depends on various circumstances including a client’s attitude to risk. If we were to assume a 4% net annual return then the outcome would be £148,024 on £100,000 invested for ten years. A 3% return would produce £134,391.60.

“As a financial adviser, I can fully assess a client’s circumstances, goals and attitude to risk, which we can then consider before researching the market place to find the most appropriate course of action.”

Margo Williams, from Nottingham, is aiming to reduce the risk of her savings losing out to inflation by making use of a mixed investment portfolio.

She said: “I knew my savings would fall behind so I took some advice and decided on a fairly safe package of half in shares and then a mixture of fixed interest accounts and property.

“It’s a balanced portfolio and might only generate an income of three or four per cent but it’s not too much of a risk and suits my purposes at the moment, which is to support semi-retirement.

"You need to bear in mind that you should keep some emergency money available. You don’t want to have to sell shares or long term investments for that. It also depends how much pension you have because you might be able to meet some costs from your income.

“There is always the option of withdrawing some of the capital if I really need to, but that would reduce what’s left to generate income in the longer term.” 

*The study by M&G Investments calculated that if £1 had been put in a cash savings account that paid average rates of interest, and with this interest reinvested, it could now be worth around £1.33 in real terms. If it had been invested in stocks and shares, its real value could now be around £11.66.

**Office for National Statistics Family spending in the UK report

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