Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
When you think about investing, you often focus on the risks. But here’s the twist - not investing can be risky too.
If you leave your money sitting in cash, inflation can quietly chip away at its value over time. That means your money won’t go as far in the future as it does today.
What does inflation do?
Simply put, inflation is the rise in the cost of goods and services over time. The result? Your money buys less than it used to.
How do you measure inflation?
Inflation is measured as a percentage - it shows how much the pound in your pocket has lost value in any given year.
Here’s a simple example showing how inflation can outpace your savings - even when you earn interest.
In the UK, the headline inflation rate usually refers to the Consumer Prices Index (CPI). This measures the average change in prices of a basket of goods and services that households commonly buy – such as food, clothing, transport, and energy bills. The Office for National Statistics (ONS) updates the basket each year to reflect how people’s spending habits change. The CPI gives a broad picture of how the overall cost of living is rising.
So, even though your savings grew, inflation outpaced it - meaning your money lost buying power.
Is holding cash a better option?
Holding your money as cash might seem a safer option. But if inflation is higher than your interest rate your money is effectively losing value over time.
Some savings accounts might offer rates above inflation. But over the long term, you’re more likely to beat inflation by investing.
Don’t forget, you can also earn interest on any uninvested cash in a Fidelity account. You can learn more about how we manage your cash here.
How investing can beat inflation
Investing comes with more risk than holding cash - but it also comes with more potential rewards. With a well-structured investment portfolio, you stand a much better chance of outpacing inflation, especially over the long term.
If you’re investing don’t forget about the importance of diversification (holding a mix of investments). This helps spread your risk, as different assets (equities - shares and funds, bonds, and alternatives), sectors and geographical areas can perform differently in the same economic conditions.
When it comes to inflation, cash isn’t always king
It’s always worth keeping some money in cash (between three to six months’ living expenses) for emergencies. But remember, cash isn’t risk free. If inflation rises, the real value of that cash shrinks over time.
By investing thoughtfully - and balancing risk with diversification - you give your money the potential to grow faster than inflation.
Want to invest? Here’s some useful guidance.
- Choose your investments
- Principles for good investing
- Become a smarter investor - sign up for expert insights
Read more from our series:
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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