When thinking about savings and investments, it’s easy to focus on broad figures and the top level stuff – interest rates and growth rates, and finding the best deal.
These are only one part of the picture. It’s important to also look at whether anything might negatively affect your savings and investment pot and what effect (if any) this might have over time.
We’ve mentioned before that your money can go backwards through two main drains:
- Inflation, and
Inflation means that the buying power of your money decreases over time, so for every £100 which you have in the bank today, it will give you less buying power in 5, 10, 20 years’ time. In other words, you can work all your life to save, and then end up with a pot that’s worth less than what you put into it.
Watch this video to understand the impact of inflation on savings. It’s a harsh lesson, but true.
Bank charges are sometimes small and hardly noticeable, but they still take a bite out of your savings. You may have a 0% charged account (excellent, if you do). If you don’t, check what fees you are paying and see if you can switch to a fee-free account. Some banks will reward customers for their loyalty by offering these; or as is sometimes the case, may only offer this to you as part of their customer retention policy – when there’s a risk you might move your money somewhere else.
To prevent your money ‘growing backwards’ like this, you need to look at ways for it to grow at a rate that is at least higher than the rate of inflation. This means something in the region of 2.5% minimum (based on 2018 UK inflation figures). If your bank does apply charges, you need to increase the rate of growth so that you stay ahead – say to 3%.
And that’s just for your money to retain its value. If you want it to actually grow, it needs to be higher again – say 4% or so.
As you would expect when taking professional advice, our financial advice services are provided at a modest fee. All fees are taken into account with any recommendations which we may make to you, to ensure the best overall financial plan to suit your objectives. For more information on fees, please see our fees blog.