In this article, we show you why saving in your typical low-interest-rate savings account means that you’re likely losing money. As the average inflation rate in the European Union is above the average savings rate, prices may be rising faster than your savings income.
According to our findings, European savers have lost $236 billion in value over just one year.
Putting your hard-earned money away for savings should provide you with peace of mind. The last thing you would expect is to actually lose money over time, yet this is exactly what has been happening to millions of savers over the past few years.
We break down the reasons why this is happening and look at what you can do to ensure you get a decent return on your savings, all while keeping them easily accessible should you need them.
Interest vs. Inflation
Before we begin, let’s introduce the two key concepts: interest and inflation.
Interest earned refers to the amount of money that you can expect to earn in your savings account over a year. When you deposit into a savings account, your bank will be able to use your money for investments and loans, meaning that you can expect a return on these savings.
With savings accounts, interest earned is typically variable — this means that the bank can change how much interest they pay almost instantly.
The Bank of England has the responsibility for setting the overall interest rate in the UK, with the interest rate normally determined by the overall health of the economy. In booming times, interest rates will generally be higher. In times when the economy is struggling more, the interest rates will be lower.
Coming off the back of the 2008 financial crisis, interest rates have been lower than ever before. This means low returns for savers.
Inflation measures the increase in prices over a year. Typically, inflation is calculated by taking a basket of typical consumer goods and measuring how much their prices have increased over the year. The more their prices increase, the higher the level of inflation, the more you need to earn to be able to keep up with the need to spend on such goods.
What’s the latest situation?
Now we come to the important part.
Over the past year, the average inflation rate in the EU has been 1.7%, while the average interest rate paid by savings accounts over one year has been a miserable 0.39%.
What this means is that your money has lost some of its ability to purchase goods, meaning that you have lost money in real terms. Essentially, the purchasing power of your hard-earned savings is diminished as it cannot purchase as much value as the year before.
As $18 trillion of savings is kept in banks in the EU, we’ve calculated through the average inflation rate and the average interest rate on savings European savers have lost $236 billion in real terms.
Let’s take a more detailed look at countries across the EU.
Breakdown of EU figures 😥
Within the UK, it’s been calculated that the average UK saver has lost almost £500 in real terms over the past year, with inflation at 2.1% outstripping the average savings interest paid at 0.23%.
In Germany we saw similar figures, with an estimated total of €38.9 billion, or 470 Euro per citizen, lost in 2018. This was a result of inflation lying at 1.93% and the average savings interest being a weak 0.19% — meaning that a total of €2 trillion in savings is losing money in real terms.
French savers, meanwhile, were confronted with an estimated loss of €3.5 billion.
More of the same in the future
These figures mean that the last 10 years have been described as a ‘lost decade’, and even though the Bank of England has started raising interest rates slightly in the past years, we’ve only seen less than a third of variable-rate savings accounts pass on any of this increase.
So what is the long-term outlook?
Well, it doesn’t look too bright so far. Analysts are generally predicting some rate rises across the European Union in the coming years. However, two points arise here.
Firstly, we already have evidence that these rate rises by central banks are not always passed on to consumers. This means that as the economy hums along and recovers, consumers may still lose money in their savings accounts.
Secondly, the rate rise is dependent on the performance of the wider economy. The greatest current risk seems to be Brexit, a national issue of great significance that is yet to be resolved. If the European economy takes a turn for the worse due to any significant shock, then it’s unlikely we’ll be seeing interest rate rises in the short- to medium-term future.
What can I do with my savings?
The great benefit of holding your money in a savings account is that you can easily access your money at any time. This means that if your savings act as a rainy day or emergency fund, then a savings account will offer you flexible access to it.
As we’ve seen, however, this flexibility is coming at a price. The low-interest rates mean that you’re actually losing money on your savings, which is far from ideal.
So what can you do instead?
One option is to invest your money into fixed-rate savings accounts. What this means is that you’ll effectively be locking your money away for a specific period of time, usually for a minimum of one year. As you commit to locking your money away for this set period, the bank will offer you a higher interest rate.
At the moment, there are over 400 fixed-rate savings accounts that beat the current rate of inflation in the UK. The longer that you lock your money away for, the higher the interest rate you will be offered.
This is mainly a great option if you’re happy to not think about the money for at least a year. You’ll get a guaranteed rate of interest that you can count on after the time-period ends.
However, we know that for many customers this is a daunting option. For most people, a savings account is there to provide safety and peace of mind in times of need. Having that money locked away for an entire year, with hefty penalties for taking anything out early, can seem daunting and counterproductive.
Here at Depoway, we’ve created a product that combines the best of both worlds.