As almost half of 2020 has been completed, it’s time to look back over the past ten years. You may have reached a certain financial goal and took steps for them. If you have looked at the performance of your savings account in the 2010s, you could be disheartened a bit. Interest rates have been all time low since the global recession in 2008 in order to promote spending and keeping up the economy. Whether you’ve had a mortgage or a loan, you would be pleased to know that borrowing has been more affordable than ever. You may have not seen a lot of returns for the efforts, if you have been saving for the past 10 years.
The Bank of England had just 0.5% of interest rate, which is a lot below the average for the initial 5 years of the past decade. It dipped even more than 0.25% in August 2016. In 2017 and 2018, there have been two increases and it reached up to 0.75%. The Bank of England could come up with another hike over the next few months to come. But uncertainty is still getting an impact and low interest rates could be the future too.
The impact of low interest rates
Savers were used to earn around 5% on savings before the financial downturn. Hence, your savings would have grown significantly in the 1990s and 2000s. But the actual impact is not clear from low interest rates until you look at inflation over the same time period.
The cost of living (inflation) is measured with the Consumer Price Index (CPI) in the UK. There have been higher benefits from interest rates for your savings as compared to inflation. For the most part, inflation has outperformed the base rate on Bank of England.
How does it affect your savings? The value of money has always been the same when interest rate matches inflation. It has the similar spending potential. But your money loses value in reality when inflation goes up.
It is not easy to completely know the effects of inflation, particularly when it comes to a short time period.
Is it the right time to invest?
First of all, investment is not the right way to grow savings for everyone. You can invest only for the long term benefits. Investing may not be the right choice if you might use savings in the next few years. Don’t invest in an emergency fund. If you want to improve your wealth in the next ten years or so, you may want to invest. Stock markets have outperformed inflation over the years. This way, you can have the opportunity to keep up with your spending power of spending. But it rises in the long run. It could be helpful to grow the money at a rapid rate for people with capital for investment.