Protecting your savings against the silent thief

User Written by Lynda Calver on July 15, 2015.

Protecting your savings against the silent thief

Any financial adviser will tell you that saving is a key part of any financial plan and essential to being able to realise your future financial objectives whether they be a university education for your kids, a second home in the sun or a comfortable retirement free of financial worry. What they should also point out is the importance of protecting your savings against inflation, often referred to as the silent thief as it can rob you of your spending power without you realising it.

A lady doesn’t generally like to reveal her age but in my selfless devotion to your financial wellbeing, I’m going to let you into the secret that I was born in 1973. We all know the world was a very different place then. Great Britain, Ireland and Denmark entered the EEC (the forerunner to the EU), the average house in the UK cost just £9,942 and a gallon of petrol cost £0.35. Back then inflation was a big deal running at 8.4% in the UK.

What did that actually mean? Let’s look at a theoretical example. In 1973 the jetski was first brought to market. Imagine that at the beginning of the year a brand new jetski costs £1,000 and you put that sum aside from your post-Christmas bonus to buy it for your beloved the following Christmas. With inflation running at 8.4%, by the end of the year the jetski would cost £1084 and you would no longer have been able to afford to buy it from your savings.

Inflation got a whole lot worse over the course of the 1970s due to rapidly rising oil prices, rising wages, an inflationary budget in 1972 and a growth in credit and consumer spending. In 1975, it hit a double-digit peak of 24.2%. In that year, the £1,000 price tag of the jetski would have rocketed to £1,242.

If we apply the same principle to your savings, you can see how easily inflation can chip away at them without you noticing. Your bank balance may remain the same, or may even be growing, but what you can buy with the money is constantly diminishing. An analysis by Lloyds Bank last year based on figures from the Office of National Statistics concluded that the value of money dropped by 91% in the 40 years from 1973 to 2013. A pint of milk which cost 6p in 1973 had risen to 46p whereas a pint of beer had gone up even more – from 14p to £2.87.

The lesson to take from all this is that your money must be earning a rate of interest at the very least equal to the rate of inflation. If it is not, the value of your savings is effectively falling. An £84 increase on the price of a jetski over the course of a year might be annoying but not catastrophic, however the equivalent decrease in spending power on your retirement savings could be devastating. That’s why stuffing it under a mattress is not a viable option, and an ordinary bank account is little better.

You can protect your savings by investing in products which offer a better return than bank deposits, although of course, you need to balance the potential returns against your appetite for risk. A financial adviser can help you to make the right decisions and ensure that the silent thief doesn’t steal away your hard-earned savings and scupper your financial objectives.

If you would like help with any financial planning issue contact me for a no-obligation introductory meeting -

Lynda Calver

Lynda Calver

Posted on July 15, 2015 in Financial Planning.