Is a cash account the best place for your money?
Like most people, during the past 12 months you may have been able to put a little extra savings to the side for a rainy day. Perhaps the family get away has been cancelled, or you’re benefitting from reduced transport costs whilst working from home. A majority of the UK workforce continues to work from home even in the current time.
Now is the time to have a look at the savings pot you have accumulated and consider whether it is really the best place for your money. At the start of the pandemic, we saw the Bank of England interest rate drop to an all-time low of 0.1% with no increases on the horizon. That continues to impact those savers in bank and building society accounts; in fact any cash based savings.
What do low interest rates mean for your cash savings?
Questions to ask yourself:
Have I ever had a year where my council tax hasn’t increased?
Have I ever had a year where my food shop has decreased?
The answer will, almost certainly be ‘No’. The reason is that dreaded word – ‘inflation’.
Inflation runs at approximately 2.5% per annum; meaning as prices or bills go up, your spending power goes down. So you get less for your money over time.
One of the key indicators is shown in our daily lives as we witness many household bills; council tax and gas and electricity bills rise year on year. Do salaries go up to compensate? Not in recent years.
Many have seen no or very small increases in salaries. With inflation factored in, wages have in spending power gone down for many.
We have to adjust our spending habits to accommodate this, buy less or buy cheaper. Reduce the number of holidays taken or extending the interval between changing the car.
As a rough example, if cash savings are earning 0.1% interest and inflation is 2.5% a year; your cash loses its buying power each year by 2.4%.
If you currently had £50,000 in cash savings earning an interest of 0.1% and considering inflation of 2.5%, you can see in the below graph below, the value is slowly eroded away. (The graph is based on no additional contributions or withdrawals.)
Why is it important to keep some money in cash?
Nobody can predict the future, no matter how well organised and managed your finances are. It is important to retain a cash sum for any unplanned emergencies. We call this your emergency fund; to be called on for situations such as boiler break down or car repairs, where you need quick access to money to fund one-off, unexpected bills.
We recommend you retain an emergency fund to cover three to six months’ worth of expenses. Money which is easily accessible and easily liquidated for these unforeseen bills.
How can you fight the effect of inflation eroding your hard-earned cash?
So, you have had a look at your savings. You’ve decided on an emergency fund you’re comfortable with for life’s unplanned expenses. You now have surplus cash that you want to see grow year on year without its purchasing power being eroded away year on year.
That’s where planning and advice can really play a part.
It can be stressful not knowing what to do with your money and difficult to know if you are using it efficiently.
We have the experience to make your cash work harder and take the stress out of planning. It is beneficial to put aside some time to speak to a Financial Planner, like myself or our team. We will work with you to understand your objectives and guide you through a process that may initially seem daunting.