With rates well below inflation, how are you maximising the returns on your savings – aside from investing?
In the past few months we’ve seen inflation rocket, and savings accounts have failed to keep up. While many people with cash to spare may decide to funnel more of it into investments, you’ll need to hold some of your money in cash in case you need to access it.
But are there any ways to hold cash savings without seeing its value totally eroded by inflation?
How inflation affects your savings
Inflation and its effect on savings is mentioned a lot, but it can be difficult to see how this monthly figure can affect your money.
Inflation – specifically the Consumer Prices Index (CPI) measure of inflation – tracks the price of an imaginary basket of hundreds of popular goods and services. The figure released each month indicates how much the price for buying everything in the basket has changed since the same month of the year before.
Say you were able to buy 50 things from the imaginary basket in January 2021. If your savings haven’t been earning any interest since then, by the time January 2022 came around you could expect to be lacking 5.5% in funds (January’s CPI inflation rate), as prices had increased at a faster rate than your savings.
That’s why it’s particularly worrying when no savings accounts can come close to matching or beating the inflation rate – as is the case right now.
Strategies to make you savings work harder
We’re looking into a few strategies on how you might be able to maximise the interest your savings can earn, without locking it all away for years at a time – when you might miss out on preferential interest rates.
One option involves splitting your savings sum into six. One sixth is sent to an instant-access account, while each of the other parts are paid into fixed-term accounts with one, two, three, four and five year terms. This way, you’ll be able to withdraw funds from the instant-access account whenever you like, while the rest of your cash earns higher interest rates.
Then, each year when the term is up, you can take advantage of the highest five-year rates on offer. So, if you started this strategy in 2022, you could take the money in the one-year fixed-term account when it matures in 2023, and pay it into a five-year fixed-term account – maturing in 2028.
The funds in a two-year account would mature in 2024, when you can also move it to a five-year account, maturing in 2029. Three-year account funds will mature in 2025, which can be placed in a five-year account until 2030, and so on.
This process continues until you have five ‘sections’ of your money in different five-year fixed-term accounts. This means most of your money will be earning the highest possible interest available at the time – and you’ll also get the chance to access extra money every year if you need to.
We want to hear from you
Have you ever tried something like the savings strategy we’ve outlined above? How was it – and do you think your savings earned more interest than if you’d left all of your cash in the same account?
If you have a different savvy way of dealing with your savings, we’d love to hear about it.
For anyone who’d rather keep their savings strategies private, let me know in the comments and we can arrange for you to email me directly.