Interest, inflation and your cash

Cash in a low-paying account is not safe. It is slowly shrinking, and the slowness is what makes it easy to ignore.

The only comparison that matters

Interest rate minus inflation equals your real return. Cash earning 2% while prices rise 5% loses roughly 3% of its purchasing power a year. That is a third of its value over a decade. Cash earning 5% while inflation runs at 2% is genuinely growing.

Compare accounts using AER (or APY), which includes the effect of compounding, rather than headline monthly rates.

Compounding cuts both ways

Compounding means earning interest on your interest. Over a year it barely registers; over twenty years it is the dominant force in the calculation. The same maths applies to debt, which is why a credit card left unpaid grows in a way that feels disproportionate.

How much cash should you hold?

• Emergency fund: three to six months of essential outgoings, instantly accessible, in the best-paying easy-access account you can find.
• Money needed within five years: keep it in cash or a fixed-term savings product. Short horizons and market volatility do not mix.
• Money not needed for many years: cash is usually the wrong home. Track G covers investing, including the risks.

Practical hygiene

Introductory bonus rates expire, usually after twelve months, and the account then pays almost nothing. Diary the expiry date when you open it. Also check whether interest is taxable in your country and whether a tax-free wrapper - ISA, or your local equivalent - is available to you.