High inflation can be a nightmare for savers, particularly when coupled with low savings interest rates.
In this guide we’re going to look at:
Inflation is simply to do with how much your money can buy.
Think about 10 years ago…
-How much did a loaf of bread cost?
-Or a liter of milk?
In all likelihood it cost less in Rands and Cents than it does now: that’s the effect of inflation.
Rate of inflation
If a liter of milk was 48c this time last year and 50c now, you could say that the annual rate of inflation on a liter of milk was just over 4%. If you then expanded that to measure the changes in price of lots of goods and services, you could see how the cost of living in general is going up, or coming down.
What is the effect of inflation on savings?
In order for your money to be “worth” the same amount, you will need the income you receive (in wages, pension, etc.) to increase by at least the rate of inflation each year.
Similarly, any “stored” wealth you have, such as your home (if you own it) or money you have invested will need to grow by at least the rate of inflation, too. If it doesn’t, your money will be losing value in real terms.
The rule is simple:
“After tax, the rate of interest you earn on your savings must be greater than the rate of inflation, in order for your money to actually be growing.”