How much money do you hold in cash accounts, like a current account or savings account? Figures suggest that millions of people are in a position to invest but are missing out on potential returns because they’re choosing cash.
A new Financial Conduct Authority (FCA) campaign is aiming to reduce “investment harm”. This includes helping investors spot potential scams and reducing the number of people invested in inappropriately high-risk investments. But one form of “investment harm” you may not have thought of is choosing not to invest.
The FCA estimates nearly 8.6 million people are holding more than £10,000 of investable assets in cash. So, if you’ve been holding cash over investing, you’re not alone. Reviewing your money can help you see if investing could make financial sense for you.
Why cash savings affect your long-term finances
On the surface, holding money in cash can seem like a sensible option. It’s in your account and you can withdraw it whenever it’s needed. This can make it seem like the “safe” choice when deciding what to do with your money.
Under the Financial Services Compensation Scheme, your money, up to £85,000, held in a cash account is often protected, even if the bank fails.
So, why would cash mean you have less in the long term? Inflation means the money in your savings account will gradually buy less. The interest rate you receive on cash savings is likely to be below inflation. Over time, the value of your savings will start to fall. It’s not something you notice in the short term, but it does devalue your savings over the long term.
Even over just a decade of saving, inflation can have a marked impact. The Bank of England’s inflation calculator shows that if you had £10,000 in a savings account in 2010, you’d need £13,112,60 to achieve the same level of spending power in 2020.
Current interest rates are unlikely to have generated the £3,112.60 extra you’d need for your savings to have the same value. As a result, your savings are now worth less than they once were.
Investing can provide an opportunity to make your money work harder and offer a chance to keep pace with inflation. However, it’s not the right option for everyone.
2 questions to answer before you invest
1. Do you have an emergency fund?
A financial safety net is important for long-term financial security. Before you invest you should ensure you have an emergency fund you can dip into when you need it. How much you need in an emergency fund will depend on your commitments, but a rule of thumb is three to six months of expenses.
2. What are you saving for?
If you’re saving for a holiday next year, investing isn’t the right option for you. Investment values can experience short-term volatility and, for this reason, investing should be done with a long-term goal in mind. Ideally, you should invest for a minimum of five years.
The first steps to take when you’re investing
If you’re investing for the first time, it can seem daunting and complex. When you’re used to holding money in cash, investing can seem risky.
While all investments do carry some level of risk, this level varies. These three steps can help you choose the investments that are appropriate for you.
1. Set out your goals
You should always invest with a goal in mind. Perhaps you want to invest so you can retire early, or want to build up wealth that you can gift to children in the future. How you want to use the money will affect both your investment time frame and the level of risk you take.
2. Understand your investment time frame
How long you will be investing for is important. Your time frame will affect how much risk is appropriate for you.
In the short term, markets and portfolios experience volatility. It can be difficult not to focus on this volatility and can lead to some investors making knee-jerk decisions that aren’t right for them. Setting out when you want to access your investments can help you keep the bigger picture in mind.
3. Know what level of risk is appropriate for you
As mentioned above, all investments come with some level of risk. However, when creating an investment portfolio, you should take the time to understand how much risk is appropriate for you.
If you’ve put off investing because you don’t like the idea of taking a risk with your money, it can be difficult to understand what makes sense for you. Likewise, it can be easy to take more risk than is necessary for your goals. Having a clear risk profile can help you make informed decisions that reflect your wider financial circumstances.
If you’d like to discuss which investments could be right for you or whether you should move cash savings to investments, please contact us.
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 investment 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.
