Why you should invest: Inflation-busting savings are back, but how much did high inflation really cost you?

Finally, we’ve reached a point where savings accounts are really worth talking about - not just because you can actually earn some interest on your cash, but because today’s ONS figures show inflation has fallen sharply to 4.6%. 

It means your cash has a chance of keeping up with the rising price of goods and services as the best savings accounts offer rates above 5% on both easy-access and fixed savings. 

While many cash huggers will be rejoicing and hunting down those inflation-busting rates, those who have shunned investing over the past few years may be a little disappointed that this equilibrium between inflation and interest rates may have come too late to grow your wealth. 

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I’ll let the figures, provided to MoneyWeek by Janus Henderson Investors, speak for themselves.

How much would I have if I started investing in 2008?

In November 2008, inflation hit 3.8% while interest rates were at 3%. In March 2009, interest rates fell to 0.5% while inflation floated at 2.8%. 

The financial crisis may have left many people a little nervous about investing - I've heard it plenty of times ‘cash is safer’. But seasoned investors also know investing is a long-term game, it comes with risk and there are ups and downs, but over time, you should see growth. 

So, how much has the combination of low interest rates and high inflation really cost you? Here’s a snapshot view of what your investment vs savings could have been worth between January 2008 to August 2023 had you put your money into a tracker fund. (data provided by Janus Henderson Investors).

Investing £20,000...

You’d have a profit of £316,820 taking into account inflation over the years.  

Investing £50,000...

You’d have pocketed a post-inflation profit of £792,050.

What would my savings be worth now?

Now let’s look at savings, where you simply earned a fixed interest. 

If you saved £20,000 a year...

Taking into account inflation and low rates, your cash would have actually lost value by a whopping £58,185. 

If you saved £50,000 a year...

Taking into account inflation and low rates, your cash would have lost value by an even bigger £145,185.

And even if you look at the cost of inflation for just 2023, savers would have lost twice as much to inflation in 2023 as they have earned in interest since January. 

Those who stashed their money into global equities have enjoyed returns six times larger than cash savings, easily beating inflation, according to Janus Henderson.

Saving vs investing

My message is clear: invest to grow your wealth, but only for your long-term goals. It's not to pay for your next holiday or something you want to dip in and out of. 

Good investors will invest a small amount each month to take advantage of what is known as pound-cost averaging, allowing you to ride the ups and downs of the market. 

Often, a cheap tracker fund is all you need. 

But of course, when it comes to your everyday cash, emergency money and short-term savings, you should certainly track down the best rate and take advantage of inflation-beating returns where you can. 

Good money management does mean getting the basics right and staying on top of savings rates, but true wealth preservation means not letting the value of your cash erode and knowing how to grow it and keep it.