Make sure your savings leave you with more money than you started with...

2 June 2011

protectmoneyNow, I am not talking about mattress-type savings. Or savings you make at your local bookmaker’s. What I am talking about is protecting your cash from inflation, which means that your money is worth less than it was.

Inflation is a measure of how much prices are going up over time, and details of the rate of inflation are published regularly. We have had really low interest rates for ages now, and lower interest rates normally means higher inflation...

Inflation 101

Let’s say you want to buy some bacon. For the ease of calculation, and because we know how much you like bacon, let’s say the bacon costs £100 today in the shops.

Now, you know you will want to buy another £100 worth of bacon next year, so you stick £100 in a bog standard savings account paying interest at 2% per annum. This means next year you will have £102* to buy bacon with. Unfortunately inflation is currently running at 5.2% , which means that the same amount of bacon next year will cost £105.20. So you are £3.20 short of your bacon. And that cannot be A Good Thing.

So what can you do about it? Well, the simple answer is to invest in a savings account that is tied to the inflation rate and then you are guaranteed to have bacon money. We told you last month about the new index-linked National Savings Certificates, which are so attractive owing to their tax-free status, but some banks and building societies do offer inflation tracking accounts too. The downside is that they normally like you to tie your money up for a fixed amount of time.

Provided your rate at worst matches, and at best beats the Retail Prices Index (RPI) you will never be out of bacon. Make sure it is the RPI and not the CPI though- the RPI is a higher measure and will therefore deliver a higher rate of savings interest.

So why doesn’t everyone have an index-linked account? Well, aside from tying cash up (even assuming you have any), the interest rate you get is not guaranteed. Yes, the rate is normally a guaranteed percentage on inflation, but the rate of inflation itself cannot be predicted. Well, not accurately anyway. While inflation is relatively high, and interest rates are low, this type of account will be better for you. But if interest rates rise, as they surely will at some point, and/or if inflation falls, an index-linked deal may not be as attractive as it currently is.

TOPICS:   Economy   Banking


  • fake b.
    My wife cleaned up all my mattress-type savings
  • Nigel
    Buy the bacon now and freeze it so it doesn't go off.
  • Billy
    Not being funny Sam, but WTF was inflation solely linked to the price of bacon ? Since last year, bacon prices have soared 15%, surely we should be investing in pigs ? All made up of course, but you get my point.
  • Boris
    This article confuses me with its bacony-ness. I have many questions I would like you to answer if you have nothing better to do. Where is this bacon of which you speak? It would help if I knew what £100 of bacon looked like. Why is it not in the picture? If I invest in Pork Futures will this be better than putting cash in a bank? Would it be better to own a pig and take individual slices off it when needed? Which bacon is most likely to go up in price? Should I be be looking to go with streaky or back? It's hard to decide. Worse stil is all the 'smoked' stuff. There are just too many variables and need some sound advice about which product will retain its value in the coming year. If I spend all of my money on bacon based investment is there some kind of insurance that the pork industry provides?
  • The B.
    Surely you should be using the Big Mac index?
  • Alexis
    No doubt the small print will exclude them in 'exceptional circumstances'. So if inflation hits 7 or 8% they won;t cover it. That's what Skipton Building Society did with their tracker mortages.
  • Boris
    Now I'm worried that one day soon the Bacon Bubble will burst. Should I withdraw from my pork portfolio?
  • klingelton
    my wife prefers it if I don't withdraw my pork portfolio.

What do you think?

Connect with Facebook, Twitter, or just enter your email to sign in and comment.

Your comment