How investing can help protect your money from inflation

Authored on
24 Jan 2023



This is the third article in our series to help you get started investing. This time we’re looking at one of the main reasons you might choose to invest in the first place: to protect your hard-earned savings from inflation.

What is inflation?

Inflation describes when the cost of living is going up and our daily essentials like food and fuel are getting more expensive. You’ll often see inflation used with the term ‘purchasing power’ - that’s because inflation makes the purchasing power of our money weaker. Put simply, inflation means £1 buys us less today than it did yesterday.

In the UK inflation is pretty much a certainty, but the rate of inflation can change and tells us just how quickly the cost of living is rising. There are a number of ways inflation rate is measured, but the main one is the Consumer Price Index (CPI). It measures the average change in price of around 700 everyday products and services and the government’s Office for National Statistics (ONS) publish these figures each month.

In recent months inflation hit a 40-year high – topping 11% in October last year. Though rates like this won’t always be the case, it highlights the importance of finding a way to protect and grow your money, to ensure its purchasing power keeps up.

Investing has the power to protect and grow your money

Inflation is important for all sorts of reasons and worth keeping a close eye on. But the reason we’re talking about it today is because higher inflation rates, like we’re currently seeing, aren’t good for your savings – left as cash, inflation is likely to erode their worth. Here’s a handy graph which shows you how, over the past few years, inflation and underwhelming average interest rates on savings haven’t been the kindest combo for your cash.

How investing can help protect your money from inflation, chart 1

Source: Barclays Equity Gilt Study 2022

But you don’t have to buckle under inflation’s blows! Investing your savings could help protect - and even grow - the real value of your cash. In fact, over the last 20 years, the returns from shares have averaged 2.9% above the rate of inflation.

Compare that with cash, which lost an average of 1.1% each year in real terms.

So instead of seeing your savings slide in their power to buy, investing could help you boost their value and take out more than you originally invested. Well that’s the aim of course, but do remember the value of investments can go down as well as up.

A very important caveat to investing is this: you must feel comfortable leaving your cash invested for the long term (a minimum of five years, but generally the longer the better). That’s because you’re more likely to see returns on your investments, and beat inflation, over time.

Are you feeling protective?

It’s your money and protecting its value matters. Savings accounts are useful when you need easy access to cash in the short to medium term, but if you want to give your cash the chance to grow and beat inflation, investing it for the long term is often the way forwards. It’s said that the best day to start investing was yesterday, but today’s the next best! 

Finally, nothing in this article should be taken as advice. Money Matters doesn’t provide advice – so if you feel unsure about anything, it’s best to speak to a qualified and regulated financial adviser.

These articles are for information purposes only and are not a personal recommendation or advice.