Inflation The Silent Thief

Inflation The Silent Thief

I’m very pleased to share 2 items of news with you today.

The first is that I have opened a savings account. Not a big deal for most people – but for me its the first account that I’ve ever opened that doesn’t come with a card or cheque book.

The second bit of new is that I’ve made a little extra money this month which I can allocate to my emergency fund. So I now have an emergency fund worth £1000 (or $1600).

So what, small stuff – some of you might say. But for me it’s another important little step in changing the direction in which my life is going.
Even though I’ve had much larger amounts than this in my accounts nearly every month over the years, this is the first time that I’ve ever had a separate savings account. An account with the sole purpose of providing a financial reserve rather than being available for everyday spending.
I feel so self righteous!

One thing that did upset me though when I was talking to my bank representative (ah yes – I made an appointment with my local bank to ensure that the account was set up properly, and that they received my cash correctly – this is special money and needed to be treated with respect) was the terrible rate of interest they offered.

On balances up to £25,000 or $40,000 they offered a rate of 0.5% – which left me feeling as though I might as well have not bothered with the bank and stuffed it under my bed instead.
Not only is 0.5% a rotten rate of return with a financial institution which aims to make a return on capital of 10%+pa for its shareholders – its 2.2% less than the current rate of inflation (here in the UK inflation is currently 2.7%).
Inflation isn’t called the “silent thief” without good reason.

Inflation The Silent Thief

Inflation The Silent Thief


The rate my bank have offered me for my savings sucks

Essentially I am losing 2.2% of the value of my savings each year the bank holds my money. Because if inflation is 2.7%pa and I only get an interest rate of 0.5% a year then the purchasing power of my money is moving in reverse.

In 5 years time – my money will be worth nearly 10% less than when I first deposited it. In 10 years time it will be worth nearly 19% less.
Take a look at this graph illustrating the effects of inflation on the spending power on our money. Check out this graph showing what will happen to the purchasing power of my money over 10 years.


I had a quick look at deposit rates in the USA and found a similar problem (one which I’m sure is replicated in many economies). Inflation in the USA is currently 1.5%, Deposit rates seem to me about 0.5% leaving your money losing value by 1%pa.
Here’s another graph illustrating the effects of inflation on the US $ in recent times.

Inflation is a truly frightening prospect it’s not called “the silent thief” for nothing.

Beating inflation should be the minimum benchmark in anyone savings plan. However – I think many people are either unaware of inflation or chose to ignore it.
As you can see – its effects on the purchasing power of your money can be devastating.

So with my savings are currently losing their value by 2.2% a year – where does this leave me and why on earth have I put my savings in an account where I am knowingly losing money every day?

The simple answer is that I’m paying for security.

  • Security in the knowledge that the actual numerical amount of money I’m saving won’t fall (even though its purchasing power will)
  • Security in the knowledge that I can access my emergency fund at any time without having to give notice or sell assets.
  • Security in the knowledge that the value of my emergency fund won’t fluctuate with market trends or values.

Small comforts – but it’s the only comfort that many savers can get.

In my own case – I don’t intend to build up large financial reserves in deposit based accounts – I just don’t see the point. I will attempt to save 2 months expenses in cash over the coming months and then start to look at low risk but higher return investments.
How much do you hold in deposit based accounts – are deposit rates equally poor in your area ?



  1. Congratulations on establishing the account and identifying it specifically as an emergency fund account. You touch on something that I advise people of when establishing an emergency account; and that is while you want to keep your emergency fund in a readily accessible account – which typically means a local bank for most people – you want to secure the best rate possible and not keep more than necessary in the account. As you note, the current rate you are getting is below the current rate of inflation, meaning the value of the money is decreasing with time. Just as investing blindly is bad, so is saving blindly. People should take the time to determine what size emergency fund they really need and not maintain any more than that…putting anything beyond that in investment accounts.

    • Thanks for the comments James – I agree with you – everyone has their own idea of how much their comfortable with in their emergency fund – once you’ve reached it let the money flow into your investment accounts

  2. Congratulations on opening the account! As for inflation, I agree that it can really impact people’s savings without them thinking enough about it. It should be factored into calculations that people have regarding their earnings. At low rates, one can lose money in reality!

    • Its such a crying shame that in times of quantitative easing – banks who are being given virtually free money by the government should be giving savers low or negative returns. With this in mind, I cant see any point in having anything but the bare minimum in deposit based accounts for the foreseeable future

  3. I applaud you Mike for recognizing the importance of an emergency fund and your progress! Reducing your monthly expenses will also reduce the amount that will be required in your emergency account and free up funds for investing long-term.

    • I think I’m through with the cutting back now. If I do any more then life is going to be a chore rather than a pleasure. I think its time to start earning more!

  4. Congratulations on taking a big financial step that is already giving you great peace of mind. I enjoyed your thoughts about inflation, too – a good reminder to invest thoughtfully and diversity. Great post!

  5. Although tame recently, inflation is one of the biggest wealth destroyers. I recommend I bonds and TIPS.

    • Hi Barbara – with QE coming to an end (tapering) i can see interest rates rising and the value of bonds falling. There might be something of a bloodbath. However, I’m going to do some research on the effect of rising interest rates on what you call TIPS ( in the UK we call them index linkers ) It will make an interesting post topic

  6. Inflation is certainly something that isn’t taken into account enough!

  7. Mike, Congratulations on both counts. It is always fun to make a little extra money. I know the rate on a standard savings account is terribly low, but the convenience of online access has helped me save a bit more. I sweep everything I don’t need for immediate expenses into savings and only transfer what I absolutely need as I need it. I know it is a mental thing, but I just won’t transfer money over for trivial expenses and if I don’t have the money in my account, I don’t spend it. It isn’t for everyone, but it works for me.

  8. Mike,

    Me again – I’ve only just discovered your blog, so apologies for leaving comments on ‘old’ posts.

    I would recommend a perusal of the Monevator website if you’ve not already found it. It’s a good resource not only about saving and investing, but also discusses the psychology behind our attitudes towards the same, and it’s UK based.

    You’re not doing anything wrong, just thebanks and the goverment don’t want you ‘saving'; they want you spending, consuming, borrowing like a drunken sailor to re-heat – er I mean re-grow – the economy, back to its pre-crash levels. As if that’s a good idea!!
    Don’t know your personal circumstances but having an emergency fund is a good idea (shame Gordon Brown didn’t have one..). Ignore the interest rate for now as this is literally money under the mattress for emergencies. In effect it’s protecting you against having to borrow cash at higher rates if you need it sharpish, and unlike insurance policies the money remains entirely yours.

    If you want to lock away and grow your money then you look at investments (with the attendant risks) but not until after you’ve cleared debts (outside a mortgage) and built an emergency fund.

    This comment’s got a bit long! I’ll stop there, but check out


  9. Good job on setting up your savings account!

    I think your 10-year graph is a little incorrect though. It’s 2.2% each year, compounding – so, it’s even worse than what you show!

    If you put $100 aside today and the inflation rate was 2.2%, this would mean it would only be worth $78.29 at the end of 10-years!!!

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