Many of us feel some degree of safety having our savings in a bank or building society. There’s something naturally ‘comfortable’ about having money in the bank. And it’s important to have money available in case of those unexpected emergencies.
A good rule of thumb is to think about your essential outgoings, so for example, your mortgage, your essential bills etc. Then have a minimum of three months’ essential outgoings readily available - in case things don’t go to plan.
And it’s also worth thinking about paying off any debts you may have if you’ve got additional savings.
But if you have more than three months essentials sitting in a bank or in cash – are you missing out?
We’ve generally all heard about inflation. The word has become part of our everyday language. But have you ever stopped to think about what it actually means and the effect it has?
What impact is inflation having on your savings?
Inflation, put simply, is the rising cost of goods you buy. If inflation is increasing it means you can buy less with your money.
In 25 years your cash could have lost almost half its value
Let’s say inflation is 2.5% each year, the purchasing power of £10,000 today could be worth just £5,394 in 25 years, so just over half. This assumes that no interest is added and the money has not grown over time.
Combining inflation with low interest rates is not good news
Interest rates have been very low for many years now. If inflation is rising and your money is earning very little or no interest, it’s effectively doing nothing. Actually it’s probably doing ‘worse’ than nothing – it’s losing value.
A recent survey* showed that 66% of UK savers knew interest rates were below inflation and yet weren’t doing anything about it. In fact, the average saver who kept their money in an easy access bank account lost almost £500** in real terms last year. So it’s worth considering whether leaving additional savings in the bank is actually a ‘comfortable’ option. Many experts will say that to really make your money work over the long term, you need to invest it in some way.
Why are we ok losing money to inflation but the thought of investing scares many of us into not even considering it?
Is it because investing is not a familiar word to us and so we shy away from it? Is it because we don’t feel we understand it? There are probably many reasons but like everything, the more you know about it, the better informed your decisions are.
Yes, investing has potential risks and you could lose money. But it also has the opportunity to grow your money and make it work harder. For example, over the past ten years, an investment in the stock market had a ^91% chance of outperforming cash. So isn’t it at least worth considering.
But remember, past performance isn’t a guide to future performance. The value of any investment can go down as well as up and you may not get back the amount you put in.
You don’t have to become an investment guru or be rich
These are myths that have surrounded the world of investing for years. But they simply aren’t true.
Whether you are completely new to investing or you have done some research – help is at hand. A financial adviser will look at your needs, discuss the level of risk you are comfortable taking and balance that with the level of rewards you are aiming for. Then they will recommend the options that are right for you. After all it is their job to be the expert – not yours.
Whether you have your own adviser or would like to talk to one of ours – it’s at least worth discussing.
Find out more about our range of investments, we have many funds with different levels of risk so you can find something to suit your needs and that you are comfortable with.
Let’s start the conversation about making your money work harder
*Scottish friendly 07/2018
**The Independent 01/2019
^ Barclays Equity Gilt Study 2017