World savings day was established in 1924 with the aim of encouraging people to save their money in a bank, rather than under the mattress. Today, world savings day is all about taking hold of your financial future. But many of the original messages are somewhat redundant.
At MoneyFarm, we whole heartedly support the premise of world savings day. As individuals we all need to take responsibility and save more for our future, the UK savings gap is estimated to reach £10,000 per person by 2050.1 However, the traditional methods of tucking away a little in a bank account each month has possible reached its limits. Is it time to rethink the way we save?
Rising inflation
Inflation is on the up, the UK consumer price index hit 1% in September which is the highest level in two years. Since then numerous companies have announced price increases; last week Morrisons put the price of Marmite up 12.5%, and the prices of Hornby model trains are set to go up by 10%.
Much of this inflation is attributed to the falling value of sterling, what that means for savers is that things are going to cost more. That puts a pinch on the amount you can afford to put away, and also what you might be able to buy in the future with your hard-saved cash. Savers need to see inflation as a benchmark to beat in order to protect the real value of their money.
Record low interest rates
The Bank of England base rate has been cut to a record low of 0.25%. Many banks have followed suit by cutting the interest rates they offer. The FCA conducted research last year that showed some banks offered savers rates as low as 0.01%.2
When this is looked at in the context of inflation that means there is no benefit to saving. When interest rates are lower than inflation the real value of your money is decreasing.
Lack of flexibility
Many of the cash savings accounts that offer inflation beating returns come with a fixed term. That means you only receive that interest rate if you leave it until maturity, this could be any length of time from one year to five years. In fact, there are just 12 savings accounts in the UK that offer inflation beating returns and flexible access to savers.3
Long term risk
The current savings environment presents a lot of risk to the UK saver. That risk is the loss of real value over time. If you’re saving today for something that you need in five or ten years’ time, the chances are you might not be able to buy as much then as you could today. The savings rates on those accounts are doing little to help you so it’s a real risk to consider.
The opportunity cost
Any money that you have saved in a cash savings account, is money that you haven’t spent or invested. That presents an opportunity cost; if you’re avoiding going out for dinner, or on a lavish holiday so you can save, you want to be sure that you’re making the most of your money. Are your savings working hard enough for you? Or is it time to reassess the risks and consider how you could make your savings go further?
1 UK savings gap, Deloitte, 2015
2 BBC News, 2015
3 Moneyfacts, 2016
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