Over the last few years, the stagnant global economy has resulted in very real financial pressures on both individuals and government entities. As economies are cyclical, sustained stagnation has resulted in something that is normally considered good: deflation. However, many Western governments, fearful that deflation will undermine their currencies, are implementing strategies specifically designed to cause inflation.
That inflation is harming the average savings account by artificially depressing interest rates that persistently remain below the rate of inflation. In simplest terms, it is now unprofitable for private investors to put their money into a savings account. With every passing year, money deposited into savings has less real buying power.
A Multifaceted Problem
Conventional wisdom sees the current savings dilemma as a multifaceted problem. In a January 2013 report from The Telegraph, Rosie Murray-West lays the blame squarely at the feet of inflation. According to Murray-West, governments in the UK, the U.S., and other countries have been running the printing presses at full speed and loaning money to banks at incredibly low rates in order to make their currencies more attractive on world markets.
As a result, banks have no incentive to offer customers competitive rates on savings because they can get money from the government so cheaply. In turn, the increased money supply causes inflation to creep up slowly. So slowly, in fact, that the average consumer does not notice it despite the fact that it is robbing both their earning and buying potential.
In the UK, inflation has been rising at a rate of 2.7% for the last several months. Most savings vehicles have rates of return that are substantially lower. Even if you can find an account that pays 2% interest -- and that's rare -- it would still not be enough to keep up with the rate of inflation.
Taking a Break from Savings
A secondary issue for investors is the temptation to take a break from savings because of the interest rate and inflation issue. When times are tough many of us find comfort in purchasing one or two of those big-ticket items we always wanted but could never afford. However, that's not necessarily a good idea.
As illustrated by an MSN Money in a November 2011 report, the average investor in the UK paid just over £130 per month into their savings plan. Taking a four-month break from savings would mean about £525 less in an account that is still bearing some interest, albeit lower than the rate of inflation.
When you stop and think about it, taking a break from savings is a double-edged sword. Not only do you have less money put away, you have also likely spent that money on other things that you don't need. Using the example above, you're really out about £1,000 because you spent the money and failed to save.
Taking a break from savings brings the temptation to spend unnecessarily; a temptation none of us can afford in tight economic times. Despite the fact that inflation is chipping away at our buying power, earning 1.75% interest is still better than earning no interest. Once the money is gone, it's impossible to earn interest on it.
Savings Options for UK Residents
If there is any good news here, it is the fact that economic conditions have historically been cyclical. In other words, years of economic recession are usually followed by years of economic expansion. That's why financial experts always encourage investors to think long-term.
That long-term philosophy suggests that at some point the interest earned on savings will rebound to the point where it exceeds the rate of inflation. And in fact, government attempts to prop up currency values artificially may bring that day faster than anyone is expecting. There will come a point when the printing presses must stop in order to avoid complete economic collapse. When that happens, the return on all sorts of investments will start climbing immediately.
For now, here are some of the investment options that UK savers have:
- Index-Linked Bonds - If you can get beyond the idea of an ISA, index-linked bonds are fairly good savings vehicles with low risk. They guarantee the money you invest will grow at least at the rate of inflation, if not more. This bond at least prevents you from losing the buying power of the money you put away.
- Fixed Rate Bonds - Fixed rate bonds are another good savings vehicle with an added incentive: the interest rate you earn does not fluctuate with inflation. The negative side to these bonds lies in the fact that your interest rate will remain the same even if the economy begins to rebound and interest rates start climbing.
- Individual Savings Accounts (ISA) - The ISA remains the savings option of choice for most Brits because its tax-free nature increases returns. You have to shop around and crunch the numbers in order to find an ISA that offers maximum returns, but they are out there. The downside to the ISA is that you are limited in terms of your annual contributions.
- Easy Access Accounts - These savings accounts are a favorite among investors who like to use them as a means of managing their routine finances. Money goes in with every pay cheque; some of it remains to gain interest while the rest is used to pay bills. When rates are attractive, this is a good option for budget management.
Shares and Share-based Funds
Investors wary of savings vehicles and willing to take some measure of risk do have other options in shares and share-based funds. One look at the numbers shows, for example, that the FTSE 100 is off to its best start in two decades for the first few weeks of 2013. At the same time, Wall Street stocks recently reached a five-year high.
It's true that share-based investing has taken some pretty severe hits since the 2008 economic crash. But as we stated earlier, these things are cyclical. Share-based funds are on the rebound as are individual share options. Investors willing to trust professional financial advice can make some real gains if they are willing to go this route.
For the average investor it doesn't mean thousands of pounds put into share investments over the course of the year. Even a few hundred pounds can be enough to get you started and show you how attractive this type of investing can be. Although few would recommend you put all of your money in shares or share-based funds, they can be a helpful part of your overall investment strategy in the months and years ahead.
The Necessity of Saving
In wrapping all of this up, it is necessary to say that current economic conditions should not dissuade people from continuing their savings programs or getting started if they have not already done so. Savings is never a bad idea when compared to the opposite behavior of uncontrolled spending.
If there's one thing the last few years have taught us, it's that none of us knows for certain where the economic winds will blow in future years. It is important to save in order to be prepared for any circumstance. For example:
- Retirement - While it's true that UK pensioners are entitled to annual payments from the government, those payments are rarely enough to allow pensioners to continue living the same lifestyle they enjoyed while they were younger. A good savings plan addresses that problem head-on.
- Medical Cost - There is no denying the out-of-pocket expenses for medical care will only continue to rise along with the rate of inflation. Not only that, but there are some things the UK health system just won't pay for. If there's any chance you're going to want private care in the future, you are going to need the money to pay for it.
- Travel - The cost of traveling abroad is prohibitive for younger families in many cases. This is why so many wait until their retirement years under the assumption that they'll have more disposable income. Saving now will give investors more money to spend on travel when they are older.
- Buying a Home - Both children and young adults would do well to start saving as soon as possible if they intend to eventually buy a home. The more money a buyer can put down on a new home, the less they'll pay in interest on a mortgage. It also means they will have their mortgage paid off that much sooner.
There are plenty of other scenarios we could suggest as good reasons to not abandon your savings plan. Even if inflation is reducing your buying power, the interest you earn will still provide you with more money down the road then you would have had by not saving.
The idea of saving for the future is as old as mankind itself. It is part of the human psyche to want to be prepared for the future by making sure there is something available if it's needed. So don't let current economic conditions stifle your natural inclination to save. Even if you can only save £100 per month, you will do better than not saving anything at all.
If you need help, consider taking advantage of the services of a financial planner. If you cannot afford a financial planner, there are literally hundreds of helpful websites with plenty of information to guide you. You may even have friends and family members with a proven financial track record able and willing to lend you some advice. Just make sure to take it vantage of your opportunities; they are the key to your financial future.
While it's not possible for us to list every institution in the UK offering savings accounts, we wanted to provide links to a few of them just to get you started. By following these links, you'll get a good idea of what's out there so you know what to start looking for. Keep in mind that rates fluctuate with regularity.
Post Office - Offers ISA’s, easy access account, bonds, and more. When you follow this link, you can instantly see their current rates online and find all the information you need to understand each of their investment products.
ING Direct - At the time of this writing, ING Direct was offering a 1.75% rate on cash ISA’s. This site gives you access to all of the bank's investment products, along with a full explanations and updated rates.
Halifax - Halifax offers a number of different savings products including easy access accounts and a variety of ISA’s. Their rate for the ISA Saver Fixed option was 2.5% at the time of this writing.
Santander - A full-service financial services company with plenty of options for individual savings. Santander was named the Personal Finance Provider for 2012 by MoneyFacts.
Comparison websites are great way to reduce the amount of time you spend researching savings options. The best comparison websites work with financial institutions you are already familiar with. Check out the following links to get started searching for attractive savings rates today:
Go Compare - This site offers rate comparisons for ISA’s, easy access accounts, bonds, and social savings. Comparisons are provided in concert with their savings partner, LoveMoney.
Money Super Market - Compare rates side-by-side on more than half a dozen investment products here. When you go with one of their partners, you could earn an extra £50 bonus.
Confused.com - Offering rate comparisons for cash ISA’s, junior ISA’s, easy access accounts, fixed-rate bonds, and more. Direct links to the appropriate financial institutions are presented along with their rates.
Compare the Market - Here you can compare side-by-side rates from preferred providers offering a number of different savings vehicles. Another option is to use their embedded search engine to delve into the broader market.
Tesco Compare - Tesco also offers rate comparisons on savings products through LoveMoney. However, before you click that link take a few minutes to read the helpful information they provide explaining savings accounts and how they work.
Money.co.uk - More than 1,900 savings options are compared here side-by-side. You can see information about rates, protection schemes, minimum balances, and more.
Money Saving Expert - All the information you need to know about saving and general banking can be found here. Their comprehensive library of information will likely answer any questions you might have.