Hidden impact of inflation on savings
A recent study has revealed that over half of the British population may not fully comprehend the hidden impact of inflation on their savings and buying power[1]. The research explored participants’ understanding of basic financial principles, including inflation, compound interest, risk and return, and the significance of life stages in financial planning.
Surprisingly, only 44% of respondents could accurately determine the buying power of money when considering both savings interest rates and inflation. This lack of understanding persisted even among those who rated their financial knowledge as ‘very or moderately good’, with only 50% answering correctly.
Impact of compound interest and inflation on savings
Moreover, fewer than four in ten (37%) participants grasped the concept of compound interest on savings. This figure rose to only 45% for those who considered themselves ‘very’ or ‘somewhat’ confident in their financial knowledge.
While it is encouraging that nearly six out of ten people believe they possess good financial knowledge, their confidence may be misplaced. Understanding the impact of compound interest and inflation on savings is essential, as these are crucial factors in making sound financial decisions.
Riskier investments are less suitable for older individuals
The study also assessed participants’ comprehension of fundamental investment principles, such as the relationship between risk and return and how risk profiles should change according to one’s life stage.
Almost two-thirds of respondents understood that higher risk generally results in higher rewards, a percentage that increased to 71% among those who were confident in their financial knowledge.
However, only 48% recognised that riskier investments are less suitable for older individuals, as they have less time to recover from potential losses.
Reviewing financial choices at different life stages
This gap in understanding was more pronounced among younger age groups (under 44), with just 39% showing comprehension of the need to adjust risk profiles based on age. It is essential to review financial choices at different life stages or after significant life events to ensure they remain appropriate.
The study highlights the need for better financial education and awareness, as a lack of understanding can lead to poor financial decisions with long-lasting consequences. By improving our knowledge of essential financial principles, we can make more informed choices and safeguard our financial well-being for years to come.
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Source data:
[1] The research was conducted by Censuswide with 2004 18+ nat rep between 4/11/2022 and 7/11/2022. Censuswide abide by and employ members of the Market Research Society which is based on the ESOMAR principles and are members of The British Polling Council.
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