If your account pays under 3.2% you will be losing money

You may have heard of people losing money when the banks it was stored in collapsed, but did you know you could be losing money in a completely healthy bank?

While your money may be safe in the physical sense, the loss actually occurs in a far less obvious way.

It's all to do with the current rate of inflation. According to the Bank of England in October 2010 this stood at 3.2%. But this simply means that something costing £1.00 this year will cost £1.03.2p next year - so your savings will be worth less when you go to spend them.

Meanwhile, you must also take income tax into consideration, as you pay this on any interest you earn with the rate depending on your current income.

With this in mind, it's important to make sure that the rate of interest paid on your savings account is higher than the rate of inflation clubbed with taxation, otherwise you will lose money.

For example, you invest £1000 into a savings account paying 3% for 1 year. Your interest at the end of the year will be £30 gross. Now take off the 20% for a basic rate tax payer from your earnings - or more if you're a higher rate tax payer, and your net final figure is £24.

Meanwhile, if you compare how much your savings have reduced in value during the course of the year due to inflation (based on 3.2%) and alarmingly you find your £1000 has in theory fallen in value by £32, making you £8 worse off after a year of saving.

This makes it vitally important to put your savings into an account that pays the highest rates. If you have any funds that are in account earning less than this you will be losing money.

Something that is definitely worth considering is putting your savings into fixed rate bonds. these accounts tend to pay higher rates than standard savings accounts in exchange for agreeing a fixed term - which means you cannot access your money if you wish to be paid the interest.

These accounts pay an agreed fixed rate for a fixed term, lasting anything from just a few months to several years, so it's important to think about how long you want to and can afford to lock your money away for.

You should also bear in mind that interest rates change, and any significant rise in the Bank of England base rate would cause savings account rates to increase therefore leaving you earning under the odds until the bons matures.