More than £300 billion lies in accounts earning less than 0.1% interest. Is your money working hard enough?

8 December 2022

One of the first things we are taught as young adults learning to handle our own finances is that “saving for a rainy day” is essential for stability. 

This rule still rings true in today’s world – without money stored away, we can’t be prepared for the twists and turns that life will inevitably throw at us. 

However, one missing piece from this age-old advice is not just that you should save for your future, but how you should save, store and maintain your wealth in the long term. 

For most people, investing your wealth in order to help it grow over time is a beneficial move. 

However, research conducted in August 2022, published by Moneyfacts, shows that a startling amount of wealth – approximately £300 billion – is languishing in cash accounts earning 0.1% interest or less. 

What’s more, research shows almost half of investors are cashing in their assets to help cover costs this year. For more information on how this might affect you, you can read our insights into the pros and cons of this move. 

But first, read on to find out how balancing cash with investments can give you the best of both worlds. 

While inflation remains high, your cash savings are likely to lose value in real terms

When the Covid-19 pandemic hit the UK in March 2020, the Bank of England (BoE) responded by lowering the base rate to 0.1%. The rate remained this low until December 2021; since then, the BoE has hiked it nine times to its current rate of 3.5%.

Running alongside this year’s continuous base rate rise has been the somewhat extreme increase in inflation. This rose to 10.7% in the year to November 2022, according to the Office for National Statistics (ONS), reflecting the severity of the cost of living crisis around the UK.

All this to say, the interest earned on your cash savings (while keeping your money safe and sound) is highly unlikely to keep up with the rate of inflation this year.

Moneyfacts reports that, on 15 December 2022, the highest interest rate available on an easy access savings account is 2.6%. Compared with the 10.7% inflation rate, by sitting in an easy access account, your cash is still losing value in real terms.

Cash savings are a beneficial low-risk option for short-term savings

While cash savings are likely to lose value in eras of high inflation, that is not to say they have no significant function within a wider financial plan.

For most people, cash savings act as their “emergency fund”. We all know how stressful it can be when unexpected expenses arrive – and that’s where your emergency fund comes into play. 

A cash emergency fund can be used to cover:

In difficult economic conditions as we’re experiencing now, cash savings can be a lifesaver. Your emergency fund, which most experts recommend should equal three- to six months’ expenses, could prevent you from going into debt when unexpected costs arise. 

In addition, there may be certain points in your financial journey where holding cash is advisable. For example, if you’re approaching retirement in a volatile period, it can pay to drawn on your savings rather than encash fund units or shares that may increase in value in years to come.

Nevertheless, as we mentioned earlier, leaving the majority of your wealth in cash could see it diminish in real terms’ value over time. 

With inflation reaching 10.7% in November 2022, large amounts of cash languishing in easy access accounts could mean your wealth isn’t working hard enough to keep up with rising costs. 

Historically, investments outperform cash over time

You might be thinking: “if cash has only performed poorly in the last few years, surely I should keep my wealth in cash for when things improve?”

While inflation has not reached double figures for 40 years, the fact remains that historically, investments outperform cash savings. 

A study conducted by Barclays found that, if you started with £10,000 in 2001, by December 2021 your cash savings would have reached £17,757. 

However, if you had invested your £10,000 in developed market shares, your returns in December 2021 would have totalled £40,515 – a 305% return. 

What’s more, investing the sum in UK shares and UK “large cap” shares would have brought your funds to £23,286 and £27,417 respectively. 

So, while past performance is not a reliable indicator of future performance, investing could outperform cash savings in the long term.

Balancing a small pot of cash savings with a larger investment portfolio can help you weather any storms that come your way

While it is clear that cash savings form an essential part of anyone’s financial plan, it is the balancing act between cash and investments that can help you both stabilise and grow your wealth over time.

Consider yourself a ship, sailing on the open sea. Your cash savings act as your anchor; when times get tough, or you need to rest, they are there to offer stability. 

Your investments, and the markets that determine their value, are the elements surrounding the ship: the sea, wind, sun and rain. You can never truly predict which way they will turn, and they could pose a risk to your ship’s structure if they become volatile. 

In the past two years, things haven’t been easy. The Covid-19 pandemic, combined with the Russian invasion of Ukraine and the political upheaval in the UK, mean your ship has been weathering storm after storm since 2020. You may have had to drop your anchor a few times in order to regain stability and recuperate before the next weather event.

In fact, it could be tempting to make your anchor heavier and heavier, keeping your ship in a low-risk harbour for as long as possible. While your safety net feels comfortable, you’re stuck – your ship can’t sail to new horizons. 

So, by trusting that the storms will pass eventually – and keeping your anchor on board, just in case – you could find that in no time, the wind is in your sails, and the elements have turned to your favour.

Your investments can pose a risk to your wealth, but in a time of high inflation, they are essential to help you meet your long-term goals. By balancing your safe, secure cash savings with a diverse investment portfolio, your ship could benefit from both a stable anchor and a smooth journey all at once. 

Get in touch

Want to build a strong portfolio that could help you achieve your life goals? Email or call 0161 8080200.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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