- 16th Sep 2015
Are your savings going backwards?
A bank is a better place to keep your money than under the mattress – but only marginally.
Of course, it’s a secure place for your money in terms of safety, but in terms of helping provide a secure future – less so. Pre financial crisis, interest rates were high enough that you could grow your money from the comfort of a cash account. But that’s not been the case for a while now. And, even with a rise in interest rates mooted, it’s not likely to be a rise that will change the savings landscape to much degree.
But inflation is so low…
…so what better time to get ahead?
Unless your savings are growing at a faster rate than inflation, you’re losing money in real terms. Over time everything gets more expensive, so unless your savings are rising too, they won’t go as far in the future as they do now.
Yes – inflation is currently hovering around zero per cent, but does that figure actually apply to you? Inflation is calculated using a ‘basket of goods’ and their collective price changes go towards producing a final overall figure. So while the UK’s inflation rate might be one number, your own rate is most likely different – depending on which goods and services you personally use.
Should I be investing then?
As a general rule, to be in a position to invest money you firstly need to be able to live without it for at least 3-5 years, and also be in a position to accept a degree of risk – in terms of personal tolerance as well as your overall financial situation.
If you look at the returns from the stock market over, say, the last 20 years compared to that of cash you’ll see a big difference. The difference is the premium you receive for the additional risk you accept when entering the stock market. While the end result over the period is much higher than cash, your money would have followed a much bumpier path. But so long as you don’t need the money in the meantime, then that’s not such an issue.
But cash does have its uses…
…growth just isn’t currently one of them. Everyone should have a cash reserve – a set amount of money ready to be used in case of emergency. The amount needed will vary depending on who you’re asking, but between 3-6 months of income is about the normal range quoted.
If you’re saving money for a relatively short period of time, cash may be the sensible choice too. Because the stock market goes up and down, staying invested for a longer period will help to limit the downside risk. If you don’t have the luxury of time, cash may be the way to go.
Staying on track
Holding money as cash often seems the most straight forward way to save. And it likely is. But that doesn’t mean it’s the best way. Everyone’s circumstances are different, and for some people holding cash will be the best thing to do, but for a lot of people it won’t. A tolerance of risk, coupled with no immediate need for your savings, points towards investing as an option. And with it the chance for your savings to grow and appreciate over time.
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Any news and/or views expressed within this article are intended as general information only and should not be viewed as a form of personal recommendation. This article is not directed to, or intended for distribution or use in, any jurisdiction where such distribution would be prohibited. To the extent permitted by law, Wealth Horizon accepts no duty of care or liability for loss occasioned to any person acting or refraining from acting as a result of any material contained within this article. Where past performance is shown, this should not be taken as a guide to future returns. Investment in the stock market is not a suitable place for short term money. The value of investments and associated income may go down as well as up and you may not get back the full amount invested.