A lot has been said recently about keeping your savings in the bank. Some reports have said it’s a waste of time, others telling you how much you should have, and some again saying it’s only getting worse.
In reality, cash bank accounts for your savings have never been the best idea. It’s only now that the headline interest rates approach 0% that it’s getting more attention. In fact, the main risk to money in the bank is inflation. It maybe isn’t actually something you know about and see coming, but that doesn’t mean it isn’t a risk.
Inflation, in very simple terms, is the increase (or decrease) in prices of goods and services. Or more accurately, you will only notice the affects of inflation by the decline in the purchasing power of your money. It’s like the wind! You don’t physically see it, but you know it’s there because you can see the affects of it. So prove it?
The Maths
When I was going to school, only 10-15 years ago, you could have stopped in at the local Maxol garage and bought a 500ml bottle of Coke (Other drinks were available) for somewhere around 70p. Now, if you were to go into the same shop, the price of that bottle is more like £1.30. If I had that 70p in the bank account, let’s say in a high interest account paying me 2.5% per annum, it would take me approximately 25 years for that 70p to be worth approx £1.30.
Don’t believe me, do the maths. It’s simple compound interest of 70 x (1.025)^25 = 129.7761 = £1.2977661 which rounds up to £1.30.
So aside from the fact that a bank account permanently paying you 2.5% is pretty much unheard of today, in the 10-15 years or so it’s taken for the price to increase, it took the bank account at least 10 years longer. That’s pretty scary! Now imagine the affects when we increase the amounts of money we are talking about from 74p to even just £500. What would you have missed out on then? That’s why cash savings are a waste of time.
BUT…Savings are necessary
There’s always a but. Cash savings do serve a purpose, and a very important purpose at that. Cash savings have two main functions:
- Your emergency fund – the money that you can fall back on should it be needed quickly
- Money that you have a purpose for in the next few years – simply because you shouldn’t be taking risks with money you know you need to spend next year or the year after that.
We always say have enough in your account to cover your outgoings for the next 3-6 months. Then, only if you are planning on buying a car next year, or putting money down on a new house in 2 years, you probably don’t need any more in cash. That’s when you look to diversify your savings into something that has the ability to at least keep pace with, if not beat inflation. There is a possibility you could lose money, but do you prefer the risk of losing money, or the certainty of losing money in the bank? Normally, the longer you leave an investment, the better chance you have that you won’t lose money.
If you find yourself in this position with too much cash, give us a go! Go through our system, no strings attached, and see what your money could do for you! It might just surprise you. Here’s one we did earlier based on £1,000 initially invested and a further £100 per month for 15 years…
