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How To Inflation Proof Your Savings
Whatever is the current inflation rate it is normally impossible to protect cash savings from the full effects of high inflation (5%+).

This is because Governments always lie about the true rate of inflation. For example, if the official inflation figure is 4.2% the reality will be that it's at least 7% or more for basic living expenses (food, petrol, electricity, petrol etc).

There are two main reasons why Governments will always try to fudge the official inflation statistics -

  1. A high inflation rate will always make their economic policies look bad, but more importantly
  2. Higher inflation means they have to pay out more money in the form of pensions, dole and state pay packets
So the reporting of a lower inflation rate will always occur unless inflation is so benign (less than 1.5%) that nobody is focusing on it.
How Is Inflation Measured

Inflation is measured as a percentage, so a 3% inflation figure means that a basket of general goods and services rises by 3% over a year. Of course not everything in the basket will rise in value, some will fall, but together the whole basket rises by an average of 3%.

As a rule of thumb an inflation figure of less than 2.5% is considered low. Between 3% to 5% it is considered as being a problem. And above 5% in a stable and large economy such as the UK it's considered a serious economic problem, and the damaging effects will be felt by the whole population.

Inflation is officially measured by two indicators -

  • The Consumer Price Index (CPI)
  • The Retail Price Index (RPI)

Both indicators try to achieve the same goal of measuring inflation, but different calculations and baskets of goods and services are used to reach an end figure.

So which one should we rely on?

Most people use the RPI as it considers important costs such as council tax and mortgage interest payments whereas the CPI does not include these.

There is often a wild discrepancy between the CPI and RPI. Perhaps the CPI is at 3.1% whereas the RPI is 4.8%. It's therefore always better to use the higher figure which will be the RPI. Use the following 2 websites to get the latest figures -

How to create a semi-inflation proof savings portfolio
Step 1 - Initial Savings Audit

Go through every savings account you currently have, including -

  • Standard Bank accounts (some pay interest)
  • Savings accounts
  • Notice accounts
  • Savings bonds
  • Premium bonds
  • Cash ISA accounts
Create a simple spreadsheet with the name of the account, how much money there is and most importantly the interest rate that's being paid.
Step 2 - Surveying the current Savings market

Cash ISAs - Use these first

The key to defeating inflation is to get the best interest rate possible. So look first at what the Cash ISA accounts are paying. Cash ISAs are simple savings account where all the interest is tax-free.

They're not always the best paying accounts, even when the tax-free advantage is taken into account, but they're usually competitive nevertheless.

One thing to note about Cash ISAs is that for small amounts of money of less than £1,000 the tax-free advantage might be worth no more than £10 a year. But some savers use them to build up large cash savings over the years which might be in excess of £25,000. Then the tax-free advantage really shines.

The general Savings market

When checking out different savings accounts and bonds be on the lookout for the small print. So as a general rule stay well clear of anything that looks complicated and you cannot instantly understand. Savings are supposed to be simple, right?

For example, many banks promote savings account that at face value pay fantastic interests rates of 10% or more. But this rate is normally only available on -

  • Part of the savings
  • Plus a minimum/maximum amount has to be deposited monthly, and
  • Sometimes other non-competitive accounts have to be opened at the same time

Basically the accounts are pretty much all marketing fluff as the interest rate they promote is far higher than the actual rate the account will receive over the full year.

However accounts that pay bonus interest rates, perhaps an extra 1% for a year or more, are worth paying money into, but only if you're proactive enough to move your money when the current deal expires and the interest rate becomes uncompetitive.

Always try to seek flexibility for your savings

I'm a strong believer that when it comes to money it pays to go for the most flexible products available for most of your money. Flexibility normally means money isn't tied up for long periods of time, plus it should be possible to transfer money without expensive penalties involved, such as losing 90 days of interest.

This is a good example of Secret 3 - Buy both simple and flexible - which is one of this site's 10 Secrets of Good Personal Finance.

However, we should not automatically disregard any product which locks up our money for long periods of time because some of them are extremely good value. But of course it all depends on how much money you have in savings.

If less than £10,000 then I would always advise going with the most flexible account that pays a top interest rate. But if more than £10k in savings then it's fine to allocate up to 25% towards inflexible products that pay superior rates but at the same time lock up your money for 1 or more years.

Step 3 - Open the account(s)

Once you've chosen the best account(s) for your money go to the bank or building society website and use the online opening procedure (most accounts can now be opened online).

Some further paperwork will then come through the post, fill that in, return it and within 1-2 weeks the account should be opened. Once that's done deposit your money.

Use Online banking (if available)

I am a massive fan of internet banking, in fact it's difficult to keep 100% on top of your finances if you don't have it.

Forget about all the online banking security scares because the banks currently invest millions in anti-fraud measures. Sure, you're always going to read scare stories in the media (scare stories are usually their speciality these days) but if you're sensible about accessing your account online, ie keep control of your login information, there is little if any risk.

In fact, even if you do find your account compromised the bank, assuming it's satisfied there was no negligence on your part (ie you let somebody know your username/login information or PIN), will cover all your losses.

I know for example several people who have experienced fraud with their credit cards when abroad and all of them have been compensated for their losses in full with no fuss.

Internet banking also makes it easy and efficient to transfer money from one account to another and that's important these days where if you want the best interest rates you have to be ready to move your money.

To summarise, if you are not using internet banking you're missing out.

Step 4 - Running the Savings portfolio

With any savings account, or collection of accounts, it's not so much a case of running the account(s) as the money will just be sitting there earning interest. But it is important to review the overall savings strategy and I would do this every 4-6 months. Right now the personal finance industry moves at a fast pace, new products are always being introduced and often come with very attractive terms.

Personally I wouldn't advise always chasing the best deals, perhaps your money is earning 3.5% and another bank offers an account paying 3.75%. Transferring money to earn an extra 0.25% is not worth it but 0.5%+ in interest should be of interest.

Keeping Good Paperwork

It is also important to keep good paperwork. One way to do this is to use 'batching', ie don't spend 5 minutes here and there sorting out bank statements and the like. See Secret 8 - 10-30 minutes a week is all you need to be financially organised - which is one of this site's 10 Secrets to Good Personal Finance.

If you do have lots of different username/passwords for internet banking then keep a small notebook handy where you write down all your login details. And if you're scared someone might find these details just use some sort of code for your passwords. For example if your password is cambridge99 write c99 as a hint in your notebook.


Using the above strategy for savings and your money will be getting the best, or near best rates on the market. And that will go a long way to defeating a high rate of inflation.

But as I said in the beginning it's just not possible to create an inflation-proof savings account when inflation is running semi or completely out of control, and that level is about 5% or higher. The best we can hope for is damage limitation.

Finally, good personal finance doesn't have to take much time. See Secret 9 - Prioritise your personal finance - be good, not perfect - which is one of this site's 10 Secrets to Good Personal Finance. I'd estimate that following the above steps won't take more than an hour or two at the most. Add to that running and managing the accounts which should take around 30 minutes per month.

To put that in perspective, if you've got significant savings the 1-2 hours might increase your overall returns by 2%, maybe a lot more which could equate to several thousand pounds.

See also

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