Inflation is back. Anybody who thought that savers’ greatest enemy was in full retreat will have been shocked by the news that it jumped to 1.9% in June.
That is a sharp rise on 1.5% in May, government figures show.
Of course, inflation has been much higher in the past. Just three years ago, it topped 5%.
But if you’re a saver, even 1.9% is enough to trash the value of your money, at a time when the average easy access account pays just 0.64%.
Trash Talking
The worst thing you can do is watch passively while inflation does the dirty to your money. If you’re earning less than 1.9%, your savings are losing their shine in real terms, year after year.
Worse, the taxman is also getting his hands on what little interest you do earn.
In order to beat inflation and HM Revenue & Customs, you need to find an account that pays at least 2.38% a year, or 3.17% if you’re a higher-rate taxpayer, according to Moneyfacts.co.uk.
Locked Away
You can get that kind of return on cash, but only if you are willing to tie up your money for at least three years. If you are, challenger banks Shawbrook and Aldermore will pay you 2.75% and 2.70% respectively.
But if you’re a 40% taxpayer, you will still get a negative real return after the taxman has taken his slice.
And a lot could happen in three years. Earlier this year, Bank of England governor Mark Carney said base rates would climb to around 3% in that time.
That could push up best buy savings rates to 5% or more.
You won’t like having your money locked away when that happens.
Risk And Reward
You can fend off the taxman by saving in a cash ISA, but the average pays just 1.57%, well below inflation.
No wonder inflation is trashing your savings. Most deposit accounts are simply garbage.
You can get a more fragrant return, but only if you’re willing to take a bit more risk, by using your £15,000 stocks and shares ISA allowance.
Fidelity calculates that if you had put £15,000 into the average UK savings account 10 years ago, it would be worth just £16,583 today.
If you had invested it into the FTSE All Share instead, you would have £35,219.
That’s a whopping £18,636 more.
The Dash From Trash
Solid FTSE 100 stocks pay regular dividends that are far more generous than any savings account.
Global telecommunications giant Vodafone (LSE: VOD), for example, currently yields 5.76% a year, nine times the average savings account.
Tesco (LSE: TSCO) yields 5.23% and after recent share price falls, is available at a low valuation of just 12 times earnings.
Pharmaceutical giant GlaxoSmithKline currently yields 5.12%.
There is nothing trashy about these yields.
Time To Clean Up
After recent dramatic stock market growth, some investors fear we could be in for a correction. It might happen, but the market is impossible to time.
The best way to protect yourself is to drip-feed money into shares, taking advantage of any share price falls to buy your favourite stocks at the new, lower price.
That’s far sounder than watching it being quietly trashed in cash.
