How fees and inflation are eroding your savings
Inflation in the UK is still running well above the average savings interest rate. This means that putting money in a savings account is effectively losing money as inflation causes prices to increase faster than your savings grow, so your ‘buying power’ decreases, says Andrew Craig.
Watch previous videos from our series:
In the third of our series, Andy Craig, author of How to Own the World explains the concept of cash erosion and just how damaging this can be for your savings, and also looks at the impact of fees.
The difference between the interest rate and the rate of inflation is sometimes also referred to as the ‘real return’ on cash. It’s essential that you consider the real return available on cash deposits when you look for and compare different investment opportunities, says Craig.
These days it can be easily done online where you will find numerous calculators that can check the impact of inflation on your savings. It’s a real wake-up call when you find that savings of £50,000 could be worth around £40,000 after ten years, with inflation at an average of around 2% over that period.
And then there’s the silent enemy — fees.
As MoneyWeek magazine puts it: ‘If the evidence is any guide at all, then there is one thing that all investors should watch out for before they put their money to work: costs.’
Just like inflation, fees can erode your savings. Craig explains how on a £10,000 investment, with a 5% annual return over 20 years, just 1% difference in fees would mean you were over £3,000 worse off.
Quite simply, after fees and taxes, the rate of interest you earn on your savings must be greater than the rate of inflation, in order for your money to actually be growing.
Andrew Craig graduated in Economics and International Politics in 1997. His first job took him to Washington, DC, where he worked for a US congressman on Capitol Hill. Since then he has spent over fifteen years working in financial markets for various firms in London and New York. These included UBS, Crédit Agricole (France’s biggest bank) and SEB (one of Sweden’s largest banks).