Savings Accounts

What is a Savings Account?

As stated by investopedia, A savings account is an interest-bearing deposit account held at a bank or other financial institution. Though these accounts typically pay a modest interest rate, their safety and reliability make them a great option for parking cash you want available for short-term needs.
Essentially, what this is saying is that it is a very safe place to keep money: the money cannot decrease like it could in an investment, and the first £85,000 are protected incase the bank or building society goes bust. These are vital to have when you need money for a 'rainy day'. Say you have lost your job, and need a few months to look for one, the money in your savings account can be used to assist you through this until you are able to get back onto your feet again.

Positives

• It is safe.
• Simple to set up.
• There is a small amount of interest.
• High liquidity.

Negatives

• Low interest rates.
• Interest rates lower than inflation mean you are essentially losing money year on year. See why here.
• Not the best long term storage of money.

How you can lose money in a savings account?

As stated above, when the interest rate on your savings are less than the rate of inflation, you will lose money year on year.
For this example, we will use the current interest rates and inflation in 2021:

• Interest Rates: 0.1%
• Inflation Rate: 2.1%

What this means that if we have a bank account with £100 in, at the end of the year, you will have gained £0.10, (an abysmal 10 pence). However, the purchasing power of that £100.10 has gone down by 2.1% which would mean that £100.10 has the purchasing power of only £97.99.
Now, lets say this repeats over ten years, here is the graph that reflects how the purchasing power would decrease.
Remember: these figures are only an example, both interest inflation change year on year.