Did you notice that although you are saving, keeping the money in the financial institutions is sometimes a very bad idea?
Yes, it is what inflation is doing with our profits. If the inflation rate is higher than the profit from the bank deposit, you are literally losing the money. That is why it is so important to be aware of it and choose the financial instruments which will prevent (or try to prevent) our money from losing its value.
Personally, I was never into bank deposits or saving accounts like Cash ISA which is available in the UK.
In the last post, I mentioned that while investing I always look at the inflation rates. It is a sustained increase in the general price level of goods and services in an economy over a period of time. In easier words, it makes our money have less purchasing power.
Bunch of charts
Let’s take a look at the situation in the United Kingdom and in Poland. Although the countries are representing the different groups of countries, the situation looks similar.
If you are lazy – just look at the yellow line. It shows the difference between the average rate of return of bank deposits/Cash ISA.
Real rate of return of average Cash ISA on the example of the representative of the developed country – the United Kingdom
According to the figures from Bank of England, in February 2017 the average Cash ISA rate in the UK stood at 0.38%. The same time Consumer Price Index peaked 2.3%. What is even more worrying is that it is predicted to rise more. The numbers show that your money is losing almost -2% of their value during one year.
Real rate of return of bank deposits on the example of the emerging market country – Poland
The tendency in Poland is similar. The average bank deposit rate fell to 1.33% in February 2017, the inflation rate went up to 2.2%. Every year the money on the bank deposit is losing -0.87%.
What can you do?
The idea can be moving the money to the instruments which will protect you from rising inflation.
For the UK residents, the solution is to transfer the money to the Stocks & Shares ISA in search of potentially higher returns. I wrote the article about this platform for investing.
In Poland – similar products are IKE and IKZE accounts which have some disadvantages in terms of withdrawal the money. Other instruments you can use are the broker accounts.
Of course, you need to be aware of the risks of investing in the stock markets. You also should not invest the money in the stock markets without being sure that you have sufficient cash to cover emergencies. Unlike cash, investments will fall as well as rise in value so you could get back less than you invest.