Saving: a tale of interest vs. inflation

When someone saves for the future, it`s good to see the interest adding up, helping their money grow over time. At the same time, though, inflation is effectively `eating` into their savings, reducing the actual value of their money.

When inflation eats away faster than the money`s actually growing, it means their money`s worth less in real terms than it once was. In other words, they wouldn`t be able to buy as much with their savings - even though they`ve grown, the cost of buying things has grown more rapidly.

So savers today are `facing an uphill struggle to maintain the purchasing power of their savings`, as Moneyfacts.co.uk puts it.

Today, a basic-rate taxpayer would need to find a savings account that pays at least 5.63% interest per year. And basically, there`s only one account that actually delivers that.

Higher-rate taxpayers, looking for an interest rate of at least 7.5%, have nowhere to turn at all.

A spokesperson for debt management company Gregory Pennington commented: "It`s pretty disheartening to see the real value of your savings eroded, but that doesn`t mean it`s not worth saving: inflation will come down at some point, although no-one knows when.

"Having said that, stories like this one do underline the importance of `doing the maths`, as they say.

"For someone with debts to repay, for example, it may make a lot more sense to use any spare income to clear their debts more rapidly, rather than putting it into savings. You may not be able to make any money on your savings, but you could save more than you think by giving your debts less time to attract interest."