Strategies for safeguarding your savings during inflationary periods

Understanding how to safeguard your savings is crucial as rising consumer prices make managing the cost of living more difficult.

The latest data on Tuesday revealed that prices in the U.S. have soared to their highest level in March since 1981, with the consumer price index surging 8.5% last month on the previous year, slightly above the forecasted 8.4% rise in prices.

Despite a 5.6% increase in real earnings since March 2021, average hourly earnings in March decreased by 0.8%, according to the Labor Department's data.

In the UK, the Office for National Statistics reported that pay, excluding bonuses, increased by 4% in the three months to February. However, on an inflation-adjusted basis, this meant that pay actually decreased by 1%.

The slowdown in retail sales in the U.K. was partly due to the cost of living crisis, according to other U.K. data on Tuesday. The British Retail Consortium reported that retail sales had risen by 3.1% in March, compared to an increase of 6.7% in February.

A survey by U.K. investment platform Hargreaves Lansdown, published Tuesday, revealed that due to the increasing cost of living, 27% of Brits have reduced their savings contributions, while 25% have spent their savings.

So how can you best protect what money you can still put aside?

Don’t lock money away for too long

According to Laith Khalaf, head of investment analysis at U.K. investment platform AJ Bell, it is crucial to comprehend that since interest rates are still below the rate of inflation, holding money in cash will result in a loss of some of its purchasing power.

To avoid locking money away for long periods of time, it is recommended to shop around for savings accounts with the best rate. However, he advised against fixed-term savings cash accounts, as rates may increase in the future.

He explained that it is not advisable to lock money away for five years at today's rates, only to find out six months or a year later that interest rates have significantly increased.

Khalaf suggested considering fixed savings account products with a term of 6-12 months, but he also noted that interest rates are predicted to increase significantly this year, although not as much as inflation.

Funds vs. stock picking

Simon Goldthorpe, joint executive chairman of financial planning firm Beaufort Financial, advised via email to CNBC that it is advisable to keep a certain amount of wealth in cash for emergency purposes, especially considering the increasing cost of living. However, anything beyond that should be invested, such as in the stock market, for better returns.

Goldthorpe advised that investors should ensure their portfolio is diversified, including investments that can thrive in an inflationary market.

When investing, savers should concentrate on their long-term goals and acknowledge that adjustments to investments are necessary as the market shifts, but remaining consistent will still result in substantial benefits.

According to Myron Jobson, a senior personal finance analyst at Interactive Investor in the U.K., investing in the stock market is a suitable option for individuals saving their money for a period of five years or more.

"A fund that performs average over the long term is likely to outperform cash, so you don't need to be a skilled stock picker to see benefits," he stated in an email to CNBC.

Khalaf advised diversifying investments by investing in funds, even if it's a market index tracker. If a saver wants to pick stocks, he recommended putting 75% of the money in funds and 25% in individual companies.

This method ensures a diversified core, even if a few companies fail, it will not significantly impact your overall wealth.

— CNBC’s Jeff Cox contributed to this report.

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