Interest rates are what you get if you’re saving your money in a cash savings account. You are offered a fixed annual rate of interest from when your account is opened, such as 1%. This means that your savings are guaranteed to grow by 1% over the course of a year. So, if you save £100, you will have £101 after 12 months. This provides some certainty for savers. However, you must also take into account the rate of inflation on your money. Inflation is the steady rise in the price of everything year after year. If inflation is at 3%, the price of food, energy or your next car will be about 3% higher than a year ago – in other words you’ll pay about £3 extra for every £100 spent. This can affect your savings too. If inflation is higher than the interest rate you’re getting on your savings, your savings are losing value in real terms. If this sounds confusing, think of it like this – the things you might want to buy with your savings are getting more expensive, more quickly than your savings are able to grow.
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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.