Inflation doesn’t just affect prices—it directly impacts your savings, loans, and financial future. As the cost of living rises, the money in your bank account may lose value faster than you realise. But while inflation can feel like a financial setback, it also presents opportunities to make strategic money moves. Here’s how inflation affects your savings and what you can do to stay ahead.
Higher Interest Rates Can Affect Borrowing
When inflation rises, banks and lenders often increase interest rates, making it more expensive to take out loans for homes, cars, or businesses. According to Jim Pendergast, General Manager of altLINE by The Southern Bank, inflation isn’t the only factor at play—overall supply and demand, financial institutions’ liquidity, and borrower risk also influence rates.
Higher interest rates can make mortgages and credit card debt more expensive, meaning consumers should carefully consider their borrowing options in an inflationary economy.
Inflation Can Shrink Your Savings
If your savings account interest rate is lower than the inflation rate, your purchasing power decreases. For example, if inflation is at 3% but your bank offers just 0.5% interest on savings, your money is effectively losing value each year.
“Your returns could be net-negative in an inflationary economy,” Pendergast warns. Even if wages increase, they don’t always keep pace with inflation, which can put added strain on household budgets.
Why Conventional Savings Accounts May Not Be Enough
Traditional savings accounts typically offer low interest rates that fail to keep up with inflation. Vince DeCrow, founder of RISE Investments, explains that if inflation is running at 3% per year while a standard savings account earns only 0.05% interest, the real value of your money diminishes over time.
This means that keeping large sums in low-yield accounts could cost you money in the long run. To preserve and grow your savings, consider alternative options.
Best Alternatives to Protect Your Savings from Inflation
Instead of relying on a conventional savings account, financial experts recommend exploring options that offer higher returns while keeping risk levels low:
- High-yield savings accounts: These currently offer 3.5% to 4.0% interest, significantly higher than regular savings accounts.
- Money market funds: These funds, which invest in short-term, low-risk assets, are currently yielding around 4.2%.
- Treasury Inflation-Protected Securities (TIPS): These government-backed bonds adjust their value based on inflation, helping investors maintain purchasing power.
Taking Advantage of Inflation’s Upside
While inflation poses challenges, it also creates financial opportunities. Sara Levy-Lambert, Head of Growth at RedAwning, suggests that consumers lock in fixed-rate loans before interest rates rise further. This can be particularly beneficial for long-term investments like mortgages.
“Locking in a low, fixed-rate mortgage can protect you from future cost increases,” she explains. Additionally, some sectors, such as commodities and real estate, tend to perform well during inflationary periods.
Reassess Your Budget for an Inflationary Economy
Adjusting your budgeting and financial priorities is crucial during inflation. Levy-Lambert recommends shifting more income into higher-yield investments and cutting back on discretionary expenses to maintain financial stability.
By adapting your savings strategy and making informed investment decisions, you can safeguard your wealth and even benefit from inflation’s economic shifts.
