7 tips to stop inflation attacking your finances


The latest inflation figures saw a sharp rise in the rate at which prices are rising.

Inflation is hugely dangerous to our income and savings, even relatively low levels can be hugely destructive, eating away at capital and reducing the buying power of our wages or pensions.

The Bank of England has the job of trying to keep inflation under control, although for some years now they have struggled to keep it at the 2% target set by the government. Indeed many economists believe a combination of rising food and energy prices, along with the effects of Quantitative Easing, could mean inflation starts to rise even more quickly as we move into 2013.

So whether you are still working or retired, a borrower or a saver, what can you do to reduce the effects of inflation on your finances?

1.    Look for inflation savings accounts

Finding savings accounts which beat inflation isn’t necessarily easy and will generally involve tying up your savings in a fixed rate bond for at least two years, if not more.

Inflation Watch

See the latest savings accounts beating inflation.

Our up-to date page shows which taxpayers are beating inflation.

Click here to see which accounts are beating inflation

Remember, you need to find an account where the net interest you receive, after tax has been deducted, beats inflation. For a basic rate tax payer to beat the Consumer Prices Index (CPI) measure of inflation a gross interest rate of 3.375% is needed, a 40% tax payer needs a rate of 4.50% and if you pay the highest rate of tax, at 50%, you will need to find an account paying 5.40%.

So, can these accounts be found?

At the moment basic rate tax payers have a relatively wide choice of accounts which beat inflation and savings only need to be tied up for two years, however 40% tax payers have to tie money up for five years and then have a very small selection of accounts to choose from.

There are currently no accounts which allow 50% tax payers to beat inflation.

2.    But beware long term fixed rates

A long term fixed rate might mean you beat inflation now but that’s only part of the story.

Many experts expect inflation to rise more rapidly in 2013 as the costs of food and energy rise and the inflationary effects of Quantitative Easing begin to be felt.

It is also true to say that interest rates are at all-time lows, not only because the Bank of England base rate is stuck at 0.50%, but also due to the Funding for Lending Scheme pushing down savings rates even further.

Whilst fixing your interest rate now might provide a short term solution, if the rate of inflation rises significantly in 2013, your savings account may no longer provide a ‘real return’. Even worse you will be locked in to the account and the return could look uncompetitive if interest rates start to rise next year.

3.    Use your Cash ISA allowance

Most savers know that using a Cash ISA (Individual Savings Account) means you pay no tax on the interest you get, making it easier to beat inflation.

Each person can pay up to £5,640 into a Cash ISA and there are a number of Instant Access Cash ISAs and Fixed Rate Cash ISAs, which will allow you to beat inflation.

Click here to see exactly which Cash ISAs will help you to beat inflation.

4.    Long term savings goals

Many of us are saving to pay for long term goals, for example retirement or meeting the costs of university for our children.

Long term goals are particularly vulnerable to the effects of inflation. You should therefore remember to regularly increase the amount you save towards such goals each year, to ensure that the capital you have is sufficient to meet increased costs in the future.

Our online savings calculators will show you exactly how much you need to save to meet your goals. Click here to use the calculator now.

5.    Invest rather than save

Over the long term investing in stocks and shares, perhaps through an ISA for increased tax efficiency, should produce a better return than simply putting money away into a savings account.

Of course there are no guarantees and investing can be a risky business, with plenty of peaks and troughs along the way. But, if you are prepared to invest for at least five years, and you are happy to take some risk, then investing can be an excellent way of beating inflation.

6.    Buy an inflation linked Annuity?

After your home, buying an Annuity is probably the single largest financial commitment you will ever make.

Despite being just one of a number of options in retirement, an Annuity is certainly the most popular method of turning your pension into an income. One of the main questions to consider when you are buying an Annuity is whether to buy a level Annuity or link it to inflation.

The income from a level Annuity will certainly start higher, by as much as 40%, but the payments are fixed, meaning that each year, inflation will erode the buying power of the income.

We discuss the advantages and disadvantages of buying an inflation linked Annuity in a recent article, click here to read more.

7.    Reduce credit card debt

Mortgage interest rates and those charged for personal loans might be coming down, but credit card debt can still me eye wateringly expensive, with interest rates often up to 20% per year.

Although having an emergency fund is important, reducing credit card debt should be your first priority, it will provide you with a better ‘return’, than any savings account. After all, a 3% interest rate on your savings account will never beat a 17% or 18% rate on your credit card.

Try and reduce the interest rate you are paying by considering credit cards with 0% balance transfers, although watch out for the transfer fees, and then over pay to reduce your debt more quickly.

Next steps

The effects of inflation are easy to ignore, it doesn’t show on your bank statement and the interest you get makes it look as though the balance in your savings account is always rising.

But be careful, inflation is lurking, slowly eating away at fixed incomes and your savings.

Following our seven suggestions will help inflation proof your finances. If you need more help, our team of Independent Financial Advisers in Nottingham are experienced in making savings and investments work harder for you.

If would like advice on your savings or investments call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk