Written by Karen Bryan
If you want to increase your wealth, you need to try to ensure that your savings and investments offer you a real return. This means that the increase in the value of your money is higher than the rate of inflation. For example, at the moment (December 2011) in the UK the Customer Prices Index (CPI) measure of inflation is 4.8%. The highest rate of interest you can find for an one year fixed rate bond is 3.6% (before tax) which reduces that rate to 2.48% for a basic rate taxpayer. This means your savings are losing 2.32% in value.
Even with a Cash ISA account, where you can save up to £5340 tax free, there aren’t any accounts paying 4.8% at the moment, the highest rate is 4.4% in a Halifax five year fixed rate account. There is speculation that inflation is starting to fall from its peak and that interest rates will increase within the next couple of years. You have to judge whether you are better off to go for a fixed or variable rate Cash ISA.
Say my savings were worth £100,000 last year and one year later they are standing at £104,000 I may think my wealth has increased in value by 4%. Wrong, if inflation has been 5% over that year, my savings have actually lost 1% in real value. Therefore to maintain the spending power of my savings, I’d need to add another £1,000 to them.
This article was featured in the Totally Money Carnival #49 on 9 January 2012.