We’ve all heard the old adage ‘cash is king’. For many years, having large sums of cash available would have been a fairly common scenario, and may not have had much of a sway on the long-term prospects for an individual’s portfolio.
However, in the current environment of low interest rates and the real prospect of above target inflation, there is a significant threat that the value of cash kept in savings will begin to erode, effectively losing value against the rate of price increases.
Here, we take a closer look…
The Bank of England voted to keep interest rates at the record low of 0.1% in July 2021, with no sign of an increase any time soon. This news was coupled with forecasts that the level of inflation may hit 4% by the end of the year.
All of this sits against a backdrop of many people having amassed higher than usual levels of savings over the past 18 months. With travel, socialising, events, days and meals out having been so limited for so long, many people simply haven’t had the opportunity to spend money as they normally would and have therefore built up savings in cash, almost by default.
The best way to approach what to do with excess cash savings will depend on your circumstances – what stage you are at in your career, whether you are still working and how long you plan to continue working for and whether you have other investments or financial liabilities.
The general point to consider is that at today’s low interest rates, the interest on cash savings will no longer earn enough interest to beat inflation. On the other hand, investing provides a much greater chance of being able to generate returns that will keep up with the rate of inflation.
Here are some general tips for how to approach an investment plan:
- Every individual should have an emergency fund; a sum of between 3 and 12 months’ worth of expenditure kept in easily accessible savings.
- The longer you can invest for, the less impact short-term volatility will have on your investment and the more risk you can afford to take.
- The earlier you start to invest, the longer compound interest has to work its magic. Compounding is when the investment returns you make in a year are reinvested, therefore allowing accelerated capital growth over time.
- Trying to time the market is notoriously difficult. Human nature makes us averse to investing when prices fall, with the temptation also being to ‘jump in’ when things are on the up. By committing to a long-term investment plan or investing on a regular basis and staying invested throughout market cycles means the likelihood of making an emotionally led investment decision is reduced.
- A diversified portfolio generally gives a much smoother investment experience – with less steep and less frequent swings in performance. Putting all your eggs in one basket carries a much greater risk and may lead to you getting back less than you invested should you need to access your money at a given point in time.
Investing can quickly become a complicated business and those without the knowledge on how to invest effectively, using the various tax wrappers available, may not be able to generate optimal returns.
Working with a financial adviser allows you to create a financial plan that is sustainable and meets your investment goals. To arrange an initial consultation with one of our advisers to discuss how we can help, please get in touch.