As we progress through life saving on a regular basis, we all get that “feel good factor” as we see our bank balances increasing. However inflation is constantly reducing the purchasing power of our hard earned money behind the scenes, often without us even realising. 

What is inflation?

Inflation is the decrease in the purchasing power of money and is reflected as an increase in the price of everyday goods. As a result of inflation, £1 in today’s money could buy us a single loaf of bread, however back in the 1970’s the same amount could have bought us 10 loaves of bread.

Is the interest paid on your cash account a “real return”?

Let’s say that your current easy access savings account has a balance of £1000 and is currently paying an interest rate of 1%. This means that in a years’ time, your account should be worth £1010 and will have grown by 1%. 

However, let’s now also consider inflation which is generally around 2%. This means that although your capital has grown, the same items which would have cost you £1000, will now cost you £1020 therefore the amount you can buy with your money has decreased - your capital has now lost purchasing power despite the monetary value increasing.

What is a “real return”?

A real return is growth over and above inflation, meaning that in the future your capital will be able to buy more than it could have done in the past.

How do I achieve a real return on my savings?

The ideal and most risk-free option would be to save into a cash savings account which pays an interest rate over and above inflation, however accounts paying this level of interest are scarce and very hard to come by nowadays.

The other option is to invest your capital into the markets with the aim of achieving a potentially higher return than the current rate of inflation. Investment returns are likely to be significantly higher than interest received on cash accounts, however they do come with varying levels of risk. Investments should be viewed as long term savings as the value of your investments will fluctuate daily and ultimately there is no guarantee that your portfolio will outperform inflation.

The risk level will depend entirely on the underlying investments within your portfolio, (for example, government bonds are typically very low risk however returns will likely be lower than their higher risk counterparts such as shares). Risk can be reduced by holding a diverse portfolio with a variety of investments across multiple sectors and geographic locations, however risk can never be eliminated entirely.

The risk level and contents of your portfolio can be tailored to you with the help of one of expert advisers and will be based on your personal financial goals and your individual attitude towards investment risk.

Your investments will be held within specific “wrappers” (such as ISA’s, pensions and investment bonds) which our experts can select with you based on your own goals to ensure that any investment is as tax efficient as possible.

If you would like to learn more about this subject or require Independent Financial Advice from our local, experienced and friendly team, please feel free to contact us on 01788 57 11 22.

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor. 

PJL Financial Services Limited are authorised and regulated by the Financial Conduct Authority. 

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