A savings strategy for an unclear year ahead

As we find ourselves in another national lockdown, this could be the perfect time to start thinking about your New Year savings strategy.

With so much uncertainty of late, many people are planning on building up a savings pot for some reassurance and a sense of security. It is important to look at a few different scenarios, so you can keep it flexible as things change. But did you know that inflation has a negative impact on savings, where it loses some of its value?

Currently interest rates are significantly lower than the rate of inflation – but this could change.

Inflation simply means the price increase on the cost of basic products such as bread and milk.

Savings are typically safe and secure, however, when setting out your money saving goals, perhaps you should consider diversification and/or several different ‘pots’. Alongside your typical bank or building society savings, some could be diverted into regular investments.

This is the time of year we set out our New Year resolutions for the short term as well as review medium- and long-term plans. It’s a great time to start a financial health regime. Similar to joining the gym, regular exercise builds stamina, regular savings and investments could build resistance to inflation and help towards an efficient way of achieving your goals.

The table below shows the effect of inflation on your savings over a five-year period:

  Your savings with interest

  The price of things you could buy for that original amount (after inflation)

  Impact of inflation on your savings

  £20,505

  £22,666

  -£2,161

  Interest rate 0.51%
  CPIH^ 2.07% (inflation data from ONS 2010-2019)

  Initial amount £20,000
  ^ CPIH – consumer price index including owner occupier housing costs

Alternatively, if funds were invested for five years then the potential value, assuming different rates of growth, is as follows:

  Investing for 5 years

  1.5%

  4.5%

  7.5%

  £20,750*

  £24,003*

  £27,652*

  *net of 0.75 charge
  Initial amount £20,000

Get in touch

If you would like help with your saving strategy for 2021, book a review with our team to discuss your New Year financial goals and build a plan that not only combats inflation, but starts a refreshed journey to financial health, as we look towards a brighter year ahead. To find out more please, contact Andrew Hennah.

Posted in News.