Low Interest Rates: The Effect on Savers For many people around the world, who have been prudent and made sure that they have saved money where possible, the current economic climate has left them suffering. Governments are trying to solve the problems caused by their less prudent neighbours and this has meant that lots of people have to try and prevent against low interest rates, and the subsequent loss of income or growth that this can cause. But what are the effect of low interest rates on savers? For a saver who was previously able to earn 5 percent but can now only earn 2 percent is earning 3 percent less than they were originally. With savings of $10,000 they will find the earnings will be dropping from $500 to $300. Which will obviously affect them. However when we add in the effects of compound interest the difference can be more startling. Over a five year period at 5 percent growth we can expect their pot to grow to $12763. At 3 percent the growth will only be $11593. As you can see this is a significant difference and one that can really affect people. What about the rate of inflation? Inflation is a value that allows you to assess the buying power of your money from year to year. The ideal situation is for an individual to be able to work out the amount their money has grown, minus inflation, to give them the actual growth of their savings. The reason for this is in real terms the amount of money you have needs to increase with inflation in order to retain the same amount of purchasing power. Conclusion Savers need to be proactive in making sure that they are earning at least the same interest as inflation just to maintain the value of their money. If they are wanting to draw an income from this cash they will need to put effort into finding rates that meet their needs. Unfortunately it may be the case that savings cannot provide the desired returns and people need to take on more riskier investments in order to protect their savings against low interest rates.