Savings v investing

Date Published: 03/05/2021 10:01

With interest rates so low, our financial planner Emma Baumback takes a look at whether you should consider investing rather than saving. 

When deciding where to put our money, most of us accept the low returns offered on cash savings on the basis that at least our money is ‘safe’. Only, the majority are now losing money in real terms as rock-bottom savings rates are outstripped by inflation.

Britain's consumer prices index is on the up - driven by a significant increase in spending from recently vaccinated consumers and the further lifting of restrictions.

The Bank of England’s forecasts are for a relatively sharp rise towards 2% in the first half of 2021 and to maintain a level close to its target of 2% for the next 3 years. And critics are now far more comfortable with this outlook!

So how will interest rates react to this? In the short term, we expect Central Banks to regard any increase in inflation as transitory as we emerge from Covid restrictions and effectively glaze over any rises through 2021. This means that short term interest rates are unlikely to be affected anytime soon and inflation remains as a key threat to our hard-earned savings.

Let’s be clear, holding some of your savings in cash is a good idea.  Any money you're going to need in the next five years should be accessible and not at the variance of the market.  It is equally important to hold a healthy ‘rainy day’ pot, known as an emergency fund. However, using cash for long-term savings is a mistake.

We have been in a low interest rate bearing environment for many years and with the forecast looking rather bleak, any long-term cash savings will be eroding. Inflation is a rogue risk, its something we do not see, we cannot see the fall in value like we see through the stock market, but it is very much real as the price of bread becomes greater. Ironically, this manner of saving can be riskier than ‘investing’ your money.

Inflation proofing your savings at the present time, means seeking a form of return from an account paying over 0.7% a year.  We can confidently say, that these are few and far between, meaning that individuals need to move up the risk ladder in order to improve your returns. 

Investing in the stock market doesn’t have to mean taking a big gamble. By investing wisely and ensuring your money has a healthy spread and exposure to a range of asset classes, regions, sectors and even funds will all help to reduce the risk you take and provide a better chance of protecting your money and even growing it above inflation – this is called ‘diversification’. 

Before you invest in the stock market, it's a good idea to get some independent financial advice.  We can help you assess your attitude to risk, review your financial goals and create an investment plan suited to your needs. Please do get in touch.

No individual investment advice is given, nor intended to be given in this article and liability will be accepted in respect of any action you may take as a result of reading this article. If you are unsure you are urged to take independent investment advice.

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