How should I save when inflation is high?

Simon4

Hi,

Me and my wife have just moved to two incomes and so have a bit more money which we'd like to save. This month, with that money, I both paid off a chunk of student loan and put a chunk into our ISA.

However, after doing some reading around I found out that (consumer) inflation is presently at 4.5%, the interest rate on my student loan is 1.5%, and the interest rate on my ISA is 1.75%.

That seems to mean that in fact the value of my loan is shrinking anyway, but so too is the value of my ISA. (My ISA rate is perhaps lower than it is possible to get because we bank ethically, and so are more limited on options than we might otherwise be).

My question is: if we now have surplus money, where is it best to put that money if both the value of my loan and ISA are dropping in real terms. To take full advantage, it would seem like I'd need some way to store the new money fixed at its present real value, i.e., some method of saving it such that it would grow at a rate which at least matches inflation, such that I could use it to pay off the loan (which is shrinking in real value) in the future - but I have no expertise with any kind of share dealing or anything like that.

Are there easy options?

Thanks

[Deleted User]

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apt

Transfer your ISA to one that pays more than 1.75%. Presumably the interest rate on your student loan will go up to around 5% at some point. When it does pay off what you can, but leave some instant access funds in case you need some.

qpop

The BoE sees inflation (CPI) falling to 2-2.5% in the medium term (rightly or wrongly) - so hopefully this period of stagflation (stagnant growth/low interest rates + high(ish) inflation) is only temporary.

Depending on your tax position and amount you want to save regularly, FD have an 8% (gross AER) regular saver, max £300pm - but you have to be a current account customer (they pay you £100 to join if you input £1.5k/month or more) - you could do worse than pay into that for a year, and then put the lump sum into an ISA (cash or S+S, depending on your saving timescale).

Voyager2002

No-one has mentioned National Savings, who often offer savings linked to the inflation rate (so that you are guaranteed that the money you save will be worth as much when you take it out as when you put it in). This product has proved to be popular and so is not always available, but keep your eyes open and it will probably be re-issued before too long. (I hope that lending to the Government is sufficiently ethical for you.)

Otherwise, you need to decide whether you are willing to accept some degree of risk. (If not, then you face the certainty of losing some of your money because of inflation.) The standard way to deal with this situation is to buy something that you expect you can later resell at a higher price: the classic is gold, silver or property (personally I think that the prices of gold and silver are likely to go down rather than up in the longer term, but plenty of people would disagree). And of course there are shares: if you are willing to consider something based on shares, be prepared to spend a fair amount of time learning about them, and DO NOT invest through your bank.