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How-to Guides » How to beat inflation

Inflation means that the cost of living is going up, and that your money doesn't go quite so far. But there are ways to beat it.

Inflation-proof your savings

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Inflation is always bad news for the nation’s savers. That’s because inflation eats away at the returns from your cash.

The solution is to find a home for your savings that offers a higher return than inflation. For example, if inflation is at 2%, you’ll need an account that pays at least 2.1% AFTER tax in order to get a return in real terms on your money. It can be tricky to find accounts that do so.

However, one brilliant way to beat inflation is with an index-linked bond.

A number of providers offer these, and they work in a very simple yet effective way.

Here’s the deal. You lock your money away in the bond for a number of years, generally between three and five years. And each year you will have interest paid on your cash, as with any other type of savings product. However, here’s the clever bit – the amount of interest you will earn is determined by state of inflation.

So you will earn a certain percentage above inflation on your cash each and every year. For example, the provider may offer a bond paying 1.5% above the Retail Prices Index (one of the measurements of inflation). If in a year’s time the Retail Prices Index stands at 4%, your savings will enjoy an interest payment of 5.5%! It’s a brilliant way to guarantee that your savings will beat inflation and make real term gains.

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Tips on this task (7)

  • diana6
    Love rating 3
    diana6 said

    Got one of these from the Post Office over five years, but it might be prudent to mention that they don't work on compounded interest. You will only receive interest each year on the flat amount originally invested.

    Report on 14 April 2011  |  Love thisLove  0 love
  • kwstas tozhs
    Love rating 0
    kwstas tozhs said

    likeeeeeeeee............ok

    Report on 18 April 2011  |  Love thisLove  0 love
  • Arblaster
    Love rating 46
    Arblaster said

    "For example, if inflation is at 2%, you’ll need an account that pays at least 2.1% AFTER tax in order to get a return in real terms on your money.!

    No, if "inflation" is "2 percent", it means that inflation is somewhere between 7 and 9 percent!

    Report on 25 May 2012  |  Love thisLove  0 love
  • JRAY100
    Love rating 67
    JRAY100 said

    Index-linked gilts are tradable when the market is open - that is, you are not locked in till maturity - unless you wish to be. They are exempt from CGT. Some funds, which are wrappers for index-linked gilts, are also tradable, often on a daily noon price.

    Report on 22 August 2013  |  Love thisLove  0 love
  • isobelsgrandma
    Love rating 41
    isobelsgrandma said

    Arblaster, I don't understand your post. Could you explain?

    Report on 30 October 2013  |  Love thisLove  0 love
  • oldhenry
    Love rating 350
    oldhenry said

    I think Arblaster is referring to the fact that CPI is a crooked index connived by the government to keep people poor and fool gullible ones into thinking inflation is low. Not so. Real inflation is what affects your weekly/monthly/annual spend and energy alone will bust your pension increase.

    If government really believed in the CPI they would link taxes to it instead of the RPi wouldn't they? They would also issue index-linked savings certificates which they are too frightened to do as they know inflation at RPI is way above interest rates that they offer on bonds.

    Report on 14 January 2014  |  Love thisLove  0 love
  • Arblaster
    Love rating 46
    Arblaster said

    Isobelsgrandma said:

    "Arblaster, I don't understand your post. Could you explain?"

    Oldhenry said:

    I think Arblaster is referring to the fact that CPI is a crooked index connived by the government to keep people poor and fool gullible ones into thinking inflation is low.

    Yes, Oldhenry; that's about it.

    My apologies for not replying. Isobelsgrandma . I didn't know you had asked the question until today.

    The government set out to fool the public. They do this in several ways:

    (a) Change the definition.

    Inflation used to be an increase in the money supply by the government - or, in common parlance, printing phantom money out of thin air. Currencies follow the law of supply and demand, too. Prices thus appear to go up--not because there is added value in the article, but because the currency has lost value. Rising prices are thus a symptom of inflation.

    (b) Think up a fancy new name.

    How about Quantitative Easing? Like it? They create new money at the flick of a switch and use it to buy their own government bonds. Bond prices and interest rates are like a see-saw: one goes up; the other goes down..That is why the interest rates are so low at the moment, because the interest rates are set by the bond markets, although the Bank of England like to pretend that they do.

    (c) Massage the figures.

    Well, one way is to change the way "inflation" is counted. So RPI is replaced by CPI. And CPI will eventually be replaced with something else.

    Once you know what is actually happening, there are ways of defending yourself against inflation. You can leave the country, of course. But here are some other ways.

    (1) Get out of the currency.

    If the currency is being weakened, then one way out is to change to a stronger one--if you can find one.

    (2) Buy hard assets

    Another way of leaving the currency is to buy things that will hold value. What these things might be will vary from person to person. But if you collect things like coins or stamps or rare books, you can invest more money in these. Precious metals like gold is a traditional hedge against inflation. Property, antiques, That kind of thing.

    (3) Panic-buy non-perishable items that you normally use.

    These could be non-perishable food like rice, lentils, quinoa, pasta. Any household goods, like soap, razor blades, toilet paper. The idea is that you might buy something now at £1. But next year it might cost £1.80. Better buy lots of them now at £1.

    Report on 10 March 2014  |  Love thisLove  0 love

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