Is your savings rate still beating inflation?

Inflation increased above expectations for July, at 3.8% year on year. This was up from June’s reading of 3.6%, and while the readings are far above the Bank of England’s 2% target, they expect things to get worse before they get better.

The rise means dwindling spending power today, but it also has ramifications for the future, as money saved in the bank loses its value if inflation outpaces the account’s savings rate.

For the past few years, cash has presented an attractive option as saving rates soared above 5%. But now, as the Bank of England cuts interest rates to 4%, it’s becoming increasingly difficult for cash accounts to outpace inflation. Less than half are now beating inflation, according to Moneyfacts, with an average rate of 3.47%.

Here are a few ways you may be able to stop inflation from eroding your savings, and start building instead:

Choose wisely with the Cash savings hub

If you are keen to keep your money in cash, but still want to create growth, having a shop around for competitive savings rates could be a big help in the process. But it’s important here to understand what sort of rates you’re signing up for, and for how long.

Using AJ Bell’s Cash savings hub, you can look through a group of cash savings options, including fixed term account and notice period accounts.  A fixed term account means your money will be held for a set period at a set interest rate, while a notice period account means that you will have to request your withdrawal typically between 30 and 90 days before you get your cash, and there is no set interest rate.

Although there are currently some options where cash savings beat inflation, those who choose to keep their money in these accounts may have to monitor the situation closely. It’s impossible to know for sure, but inflation is expected to rise more before it falls, while interest rates look likely to be cut. If you have money in an account that has a flexible interest rate, you’ll need to continue to monitor this so you can make sure your savings are at least keeping pace with inflation, if not beating it.

While notice period accounts do have an interest rate that can change, you will be notified of this before and will have the opportunity to put your withdrawal request in.

Using Money Market funds

If you are looking for the flexibility and consistency of cash but are happy to take a bit more risk and invest through a stocks and shares account, you may opt for a Money Market fund. These funds invest in short-term debt issued by governments and companies, aiming to create a slightly better return than cash at a low level of risk.

Money Market funds do not have a set interest rate, like you would find in a fixed-term savings account. Instead, the returns are highly dependent on interest rate expectations. However, in some ways, they offer more flexibility. Instead of having to keep your cash in an account for a pre-determined amount of time, or give a long notice period, you are usually able to withdraw from a money market fund in just a few days.

While these funds will not offer spectacular returns if interest rates are low, they are managed to maximise the interest received without taking too much risk, so they could save you the trouble of needing to search around for different savings accounts. Importantly though, money market funds can fall in value, which makes them risker than a cash account.

Making the move to investing

For some people, it’s not going to be an option to take their money out of cash. You may need an emergency fund, or be about to purchase a house, and not want the volatility of investments.

However, across all age groups, more people contribute to cash ISAs than Stocks and shares ISAs, by nearly double. And almost 3 million UK adults have over £20,000 in a cash ISA, but no money in a Stocks and shares ISA.*

For those savers with a long road ahead before they plan to access their savings, putting money in the market has the chance to create a large boost. Historically, stock market returns have significantly outpaced interest rates on savings, and inflation. If the pattern continues, it means that invested savings could not only keep their value despite inflation, but grow ahead of it.

In the past five years, the average yearly consumer price inflation rate has been just over 4.5%. Meanwhile, the MSCI World, an index tracking companies across the world, has returned an average 12.8% on a yearly basis. Of course, this is no guarantee of future growth. The last five years have been very favourable for stocks, and diving into the market does mean that an investor would have to weather some downturns as well. But if your money is saving for the long term, it might be a way to make it go further.

*Source: AJ Bell. Analysis of HMRC and ONS data. Total percentage of UK adult population in each age group contributing to ISAs in 2021/22