Posted by Michael Donelly

Here at Anotherway we have very specific views about the future of the economy and also inflation. John Hughes from independentfinancialadvisor.co.uk approached us to post an article about beating inflation. To give our readers an unbiased perspective it’s published below, but we certainly don’t agree with it, mainly because we believe that keeping money in any financial institution or even in bonds is currently (late 2011) more risky than cash in the mattress, low risk equities and gold. The reason our view differs from Sean’s is that we believe that rather than simple inflation, that the world is staring into the jaws of hyperinflation, a very different beast  For more details on this you can read this article on wealth management and articles related to it. And now over to John….

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Soaring inflation coupled with a low Bank of England base rate has had a disastrous effect on savers lately with many finding that their savings are losing value in real terms.

What’s inflation got to do with it?

We all know that earning a high level of interest on our savings can only be a good thing, but why is the rate of inflation so important? Inflation measures the cost of living across a period of time, taking into a account the cost of goods and service. Rising inflation reduces the spending power of a unit of currency. This means that interest rates need to keep up with inflation in order for the value of your capital to remain stable. If inflation is at 5% than you will need an interest rate of more than 5% in order to make any profit from your savings, and anything less will mean you are losing out.

Is there any way to beat it?

There are very few savings accounts available on the highstreet that offer inflation beating rates but it still is possible to get some higher than inflation rates if you are willing to spend some time shopping around.

Generally speaking instant access account will offer some of the lowest interest rates, so the ability to make a commitment with your cash can help you get the best available deal. Different accounts will place different restrictions on access but the longer you are able to leave your money tied up the better the rate you are likely to get. Look out for 12 month introductory deals too, as you can often take advantage of special rates and then move on once the 12 month period is over.

You may also want to consider putting your cash into an Individual Savings Account (ISA) which acts like a tax free wrapper for your money. There are two types of ISA available, Cash ISAs and Stocks and Shares ISAs. Cash ISAs tend to be less risky but will also normally offer lower rates. An ISA can offer much better rates than instant access savings accounts, and could help you earn more from your savings by protecting any returns from UK Income Tax and Capital Gains Tax.

Finally, you may want to consider investing, introducing an element of risk to your capital in pursuit of higher interest rates. There are a number of investment options available, including bonds which can be a good place for the first time investor to start. Bonds tend to be a safer investment option than putting your money into stock and shares investments, but finding the right option for you will depend on your own individual circumstances.

Many savers could also benefit from revisiting their investment portfolio on a regular basis to ensure they’re getting the best deal. It’s all to easy to put your money into an account only to forget about it or let it stagnate. Keeping track can help you make the most of what you already have.

Interest rates may be at a historic low, but keeping a rainy day fund can still prove invaluable. Many experts recommend you have up to the equivalent value of three months salary put away in case you should fall on hard times or lose your income. Finding a good interest rate could provide you with capital growth or even a regular income, and the good news is that interest rates do look set to pick up next year.

This post was written by John Hughes who is the resident blogger at www.independentfinancialadvisor.co.uk , a UK based site that provides access to financial advisors as well as to debt advice charities for those struggling with their debts.