If you haven’t heard the latest about the interest rates in the UK, where have you been?
The Bank of England has slashed their base interest rate from 0.5% to 0.25%. 0.25% is a new low interest rate for the UK and is aimed to help stimulate the economy after Brexit.
What does this mean?
Well, the most important lesson to learn is that people relying on interest-paying savings are going to be affected.
Interest rates are already low, with some paying between 0.25% and 0.5% p.a. with the higher interest rates achieving up to 5% p.a.
The higher interest rates may require your money to be locked in and deposited monthly.
The lowest interest rates are usually low because you can withdraw from them without suffering penalties.
Your wealth is important to you. You have worked hard for your money and it is important to preserve your wealth.
You have plans for the money saved up.
A holiday with the family, new car, new house, second house or whatever your heart desires.
What does one mean by “preserve wealth”? It’s by understanding and knowing the number 1 enemy to money. We will reveal this later on.
What you should know, is that with low interest rates astute investors invest in the stock market looking for larger gains outside of interest rate saving accounts.
We all want our money to work as hard, or harder, than we did to earn it.
That’s why with the latest interest rate cut, saving interest rates will fall even lower – with some banks talking about 0% interest. Of course, the banks have to accommodate all scenarios of the economy, good or bad.
So, why are low interest rates good for the economy but bad for the savers and the people who hold their money in their current accounts?
- Firstly, if your savings / investments only come from interest rate based products – you will suffer most.
- Banks could implement negative interest rates and end up charging customers to hold their money.
- Your money could be tied up for years at a low interest rate.
- The price of services and goods may increase, meaning the real-value of your money is less than it is today.
So what is inflation?
Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.
When the price level rises your money buys fewer goods and services.
Consequently, inflation reflects a reduction in the purchasing power – a loss of real value of your money.
Essentially, you want your interest rates and your investments to match and beat inflation – hence preserving your wealth.
If you are earning less than the increase in inflation, you are losing the real value of your wealth. Check out our graphic below, taken from our brochure.
As you can see, without any action in preserving your wealth you’ve obtained today, then tomorrow’s wealth will be less.
The current inflation rate of the UK is 0.5% with the Bank of England targeting 2%.
After Brexit, in the Bank of England’s latest Inflation Report, they state:
The fall in sterling is likely to push up on CPI inflation in the near term, hastening its return to the 2% target and probably causing it to rise above the target in the latter part of the MPC’s forecast period, before the exchange rate effect dissipates thereafter.
With current conditions, inflation is on the rise:
So – if you have interest rate savings; if you are earning less than 0.5% per year on these savings; you are losing the real value of your money!
If your interest saving rates are at 0.5% or higher then you are keeping at pace with inflation or beating it.
Soon, interest rates offered on savings and current accounts from banks may go lower after the Bank of England’s base rate cut to 0.25%, which means it would be a good idea to start looking for alternatives to preserve wealth and the real value of your monies.
To put things into perspective:
If you were earning 0.25% on your interest earning account and inflation is at 0.5%, your wealth would be eroding -0.25% a year if you did nothing with it.
So where do you look to beat inflation?
There are other alternatives such as real-estate and the stock markets. Although be it involving risk.
However, with low interest rates and higher inflation – your money will be eroding away like in the example above.
People have been using the stock market to help grow their wealth.
The stock market requires you to take a more pro-active approach compared with money sitting in your bank account gaining interest.
It also, of course, involves risk.
However, you can invest not only to increase your capital but to also receive income through company dividends.
Some investors only invest for capital growth.
Some investors only invest for income, receiving company dividends straight into cash.
When you have a sizeable portfolio, dividends from companies could provide a secondary income.
You can invest in the stock market in two ways, either by yourself or through a professional service like a stockbroker or an investment management service.
As an investor, your goal is to not only invest in inflation beating investments but to also outperform inflation to reward the risk of the stock market.
Disclaimer: The above is not considered financial advice or any endorsement to use any particular service. If you wish to use any of the services mentioned, please seek independent advice.