Can you afford to keep your savings in cash?
We may be a month into the New Year but, for me, it still feels fresh and new. 2018 is a blank canvas ready to be filled with new experiences, memories and adventures. Plus, four weeks in, most people are still sticking to their New Year’s resolutions, whether they involve letting go of old habits, embracing a ‘new me’, a ‘new hobby’ or reassessing their attitude to life and relationships. I’m no exception, and as 2018 continues the pattern of depressingly low interest rates on savings accounts and tax-free cash ISAs, I’ve decided it’s time for me to reassess my attitude to saving and investing. It’s time to explore both sides of the ‘coin’ and consider whether cash savings will be enough to support our family for those crucial life moments that lie ahead.
With both of our girls hurtling towards milestones like driving lessons, higher education (and, dare I say, weddings), we need to plan ahead if we want to make the most of our savings and investments.
Last year I admitted to being a bit of a ‘safety girl’ when it came to money, with a natural tendency towards cash savings as opposed to higher risk investments. Perhaps it has something to do with my pharmacy background where risk management was the order of the day and the merits of every decision, policy and action were measured in terms of risks and benefits.
However, with some banks and building societies continuing to offer pitiful interest rates, despite a rise in the base rate from 0.25% to 0.5% last November, could it be time to ditch cash savings in favour of longer-term investment options, with the potential for greater returns?
Changing the way we think about savings.
We already have some of our savings invested in stocks and shares ISAs and they’ve performed well over the last 10 years. However, letting go of our natural preference for cash savings hasn’t been easy. I don’t think we’re alone, either. Before the government introduced ISAs back in 1999, entitling everyone in the UK to tax-free savings and investments up to a specified allowance, (the current ISA limit for 2018/19 is £20,000), most of us put our money in the bank, as did our parents and their parents before them. This wasn’t a bad idea when interest rates were higher. However, the financial landscape has changed, and poor interest rates mean cash is no longer ‘king’. Consequently, more and more people (myself included) are looking for alternative investment products, with the potential to offer a better return on investments in the long-term*.
Why do Brits love keeping money in cash?
- For many Brits, the balance of your savings account is an indication of your wealth. As a nation, we seem to love keeping our money in cash (source). But is keeping the bulk of your money in a savings account, or stashed in a piggy bank still the safest option?
- Cash savings often seem safer to people. You see it in your bank account, and you know it’ll stay there. According to research by UBS SmartWealth, even those with as much as £50,000 to manage are twice as likely to hold cash ISAs as they are stocks and shares ISAs*.
- Investing in non-cash assets, such as equities or bonds, can feel a bit alien. It’s also hard to find the right advice, or even basic reliable information about your options.
- When it comes to non-cash assets, Brits aren’t sure how to make the right decision, or what may happen to their money.
Why should people consider investing in non-cash assets like stocks & shares?
- Assets such as equities and bonds have a proven track record of consistently beating cash for returns (source)
- Money you put aside each month will start to earn its own returns
- Interest rates for Cash ISAs, which used to be the first port of call for savers, are languishing below 2% AER.
- Even the biggest lovers of cash and ‘risk averse’ savers should think long and hard whether this strategy is the best one in the long-run.
- The Governor of the Bank of England, Mark Carney, famously said in 2014 that interest rates of around 2.5% should be considered the ‘new normal’ (source). If he’s right, then it will be many years before bank accounts start to deliver the kind of meaningful returns provided by other assets.
- In a low interest environment, your cash in the bank is vulnerable (source).
Do we still need cash savings?
Despite low interest rates, there are still very good reasons for keeping cash. For example, according to Money Advice Service, people should always have an emergency fund that covers all living costs for at least three months. Cash savings may be the best option for short-term expenses or if you need to access funds quickly.
Cash savings may be enough for short-term expenses. However, for long-term goals, it’s important to plan ahead. Consider what your financial targets are five, 10 or even 20 years from now, then you can put in place a strategy to meet the goals.
If you’re nervous about the idea of putting your money into non-cash assets, or you aren’t sure what investments would be right for you, UBS – the world’s biggest wealth manager (these are the guys that look after the wealth of billionaires) has a really simple online tool called UBS SmartWealth that asks you a few questions and advises you on what investments you should make. They also help you see how much you can grow your hard-earned money by over time and whether or not it’s enough to achieve the things you want to achieve in life.
Over to you.
If you have savings, do you keep your money in cash (perhaps as an ’emergency fund’) or do you have non-cash assets too, like equities and bonds? Are you planning ahead and saving for those crucial life moments or do you prefer to live in the moment and take things as they come? In this era of low-interest rates, where cash savings (even tax-free investments like ISAs) aren’t giving you a decent return on your investments, are you ready to consider alternatives? As always, I’d love to know what you think.
Pin for later:
* The research was carried out between UBS SmartWealth and Censuswide, an independent research company, with a research panel of 1,000 respondents between £50,000 – £250,000 investible assets.
Important Information – The price and value of your investments and income derived from them can go down as well as up. You might not get back the amount you originally invested.
This is a sponsored post. As always, the words and opinions are my own and aren’t intended to be a personal recommendation in respect of a particular investment. As with all financial products and investments, I recommend seeking independent financial advice.