Putting your hard-earned cash into savings accounts may not be the most efficient way to make your money work for you.

If you’ve been placing your cash into a savings account over the past decade, you might be surprised to find that your money could now be worth less now than when you first put it away. According to research from AJ Bell, if you’d put £10,000 into a cash ISA 10 years ago, it would now be worth £9,772 even when accounting for interest.

So why is this? Inflation is currently outpacing interest rates, with the latest figures showing that it reached 0.7% in January. Meanwhile, the Bank of England (BoE) base rate has stayed at 0.1% since March 2020 and doesn’t look likely to rise any time soon.

The BoE base rate influences how much banks can charge people to borrow money or what they pay on savings. As a result, the current situation is bad news for savers as it reduces the spending power of their money. Yet it’s good news for some borrowers – for example, those with a fixed-rate mortgage benefit from inflation as it effectively reduces their debt.

What is inflation?
Inflation is the rate at which prices for goods and services increase, affecting what you can buy for your money. The most common estimate is the Consumer Prices Index (CPI) measured by the Office for National Statistics (ONS).

It looks at the prices of thousands of things people spend money on, from cinema tickets to bikes, computers and TVs. It’s important to remember that inflation is only an average rate that looks at certain products, so it affects households in different ways.

One of the BoE’s key roles is to ensure that inflation stays at a target of around 2%. So if inflation falls below this level, the BoE is likely to cut interest rates to lower the cost of borrowing and encourage spending.

What’s the alternative to cash?
If you’d used your whole cash ISA allowance each year and put in the maximum of £127,320 since 2011, it would now be effectively worth only £124,857, according to AJ Bell. Yet if you’d put the same amount into an average global stock market fund, it would now be worth £196,079 after accounting for inflation.

This means that if you’d started putting your money into a stocks and shares ISA at the same time, you’d be much better off than if you’d stuck with a cash ISA. Despite this, many people still hold onto their cash because of the security and convenience it offers. While it’s important to have access to some cash for your short-term needs, it makes sense to invest your money when thinking about the long term so you don’t lose out to inflation.

What about junior ISAs?
A junior ISA is a useful way to save or invest for a child under the age of 18. When they turns 18, the account can be converted to an adult ISA. There are two types available: a junior cash ISA or a junior
stocks and shares ISA. As with an adult cash ISA, putting the money into a junior cash ISA means it may not grow as quickly as inflation. Alternatively, the returns from a junior stocks and shares ISA
depend on the performance of the underlying investments.

So although investing does come with its own risks, you’re likely to achieve higher returns than if you leave your money in a cash savings account. If you’d like to find out more about investing, a financial adviser can talk you through your options and help you find the most appropriate solutions for your circumstances.

An ISA is a medium to long term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

Key takeaways

• Cash savers have lost out over the past decade as inflation is outpacing interest rates and reducing the spending power of their money.
• Inflation is the rate at which prices for goods and services increase, affecting what you can buy for your money. The most common estimate is the Consumer Prices Index (CPI) measured by the Office for National Statistics (ONS).
• Stocks and shares ISAs have performed much better than cash ISAs over the past 10 years. While investing has its own risks, you’re likely to achieve a better return in the long term compared with cash savings.