Make sure inflation doesn't erode your savings
When analysing the real growth on a savings investment you need take into account the effects of inflation — the rise in prices for goods and services.
For example, if the rate of inflation is 3.5% for a year and your savings account AER is 6%, your return after adjusting for inflation is only 2.5% (6% minus 3.5%).
If your savings account has an interest rate that is below the rate of inflation, you are in effect losing money. If you are earning 2% on an account when inflation is 3.5%, you are earning a negative real return of -1.5%.
Financial experts say you should also take into consideration the impact of income tax to get an accurate picture of returns.
If inflation level were 3.4% (October 2006), a higher rate taxpayer (40%) would need a return of at least 5.67% to match inflation and a basic rate payer would need 4.25%.