Why your bank is laughing at you…
How much money do you keep in your current account? If you keep a sizable balance in your current account on a month-to-month basis, you’re likely losing money. That’s because current accounts are guaranteed to lose you money.
Yes, current accounts are a necessary part of life. The provide easy access to cash, convenient purchasing power, and the ability to write cheques for larger purchases. Those benefits make current accounts ideal for funding monthly bills and day-to-day purchases.
However, a current account can become a drain on your money if you keep a regular balance above and beyond the amount needed to fund expenses. That’s because current accounts generally don’t pay interest. Any money that sits in your current account will not grow because there’s no accumulation of interest.
Some view current accounts as “safe” because the balance won’t fluctuate due to volatility in the financial markets. The account doesn’t earn interest, but it’s also in no danger of decreasing in value.
However, that doesn’t mean you can’t lose money in a current account. You can, and it can be as corrosive and dangerous as any market volatility.
The risk to current accounts comes in the form of inflation. Since 1950, the UK has experienced average annual inflation of 5.54 percent. That means that on average, the price of goods in the UK has increased by 5.54 percent every year.
Inflation has slowed in recent years. It is currently 2.1% in the UK. Inflation can also sometimes be incredibly high. In the 1970s and early 1980s, inflation was in the double digits nearly every year, even hitting as high as 24.24 percent in 1975.
Many people don’t notice the cost of inflation because it doesn’t show up on an account statement. However, inflation has a very real impact on your standard of living and your money’s purchasing power.
Since 1994, the cost of goods in the UK has increased by 93.7 percent. That means that what cost £100 in 1994, costs £193.7 today. Even since only 2004, UK has seen inflation of 50.08 percent.
What does all this have to do with current accounts? Remember, when you keep excess money in a current account, you don’t earn interest, which means the balance doesn’t grow. However, the prices of goods are rising. That means that even though the money in your current account is going down in value, it is losing purchasing power.
To fight off the corrosive effect of inflation, you need to allocate money to investments that will at least beat inflation over the long-term. Keep in mind, beating inflation doesn’t necessarily mean taking on high levels of risk. A financial adviser can help you diversify your portfolio across assets that can beat inflation and also mitigate risk.
To understand what to look for in a great financial adviser, download our free guide here.
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Blog published by Mike Coady
