Building a nest egg? Don’t put all your eggs in one basket.

Is it time you move from cash savings to investments?

The inflation rate currently sits at a massive 9%¹, with the Bank of England forecasting that rates will continue to rise to 10%². Although they are expected to decrease next year and be close to 2%³ in around two years,⁴ inflation will still affect the purchasing power of your cash savings.

Why has inflation risen?

Supply and demand for goods was and is out of balance. Covid-19 saw changes and restrictions in the transportation of goods, and a decrease in manufacturers’ output – so prices went up. Even though the Bank of England has predicted that inflation will fall again, the prices of some goods may remain high compared to previous years. In addition, the dramatic increase in food, oil and gas prices has pushed inflation up even further.

In May of this year, bank rates rose to 1%⁵, up from 0.25%⁶ just under six months with many high street banks offering interest rates as low as 0.01%⁷ on savings. Consequently, hoping that having a lump sum of cash in the bank will see you through your retirement years won’t ‘cut it’ in the current and possibly future economic climate, and despite some financial sources predicting that interest rates on savings will increase in the coming year, your cash nest egg might not be sufficient to beat sky-rocketing inflation.

Why have we become attached to cash?

The 2016 Personal Savings allowance scheme has eliminated taxation on earnings from interest on savings in a two-tiered tax bracket system making cash savings appealing and a seemingly great way of securing your finances.

And then there was the pandemic.

HM Revenue & Customs stated that £75billion⁸ was invested into adult Individual Savings Accounts (ISAs) in the 2019/2020 tax year which was a £7.1billion⁹ increase on the previous year. The national lockdown during Covid-19 resulted is people spending far less and ploughing their surplus money back into savings accounts. Nearly two years of travel, spending and socialising restrictions made many people cash rich. In 2020 the UK savings ratio hit a high of 25.9p¹⁰  in every £1, compared with 6.2p¹¹ in every £1 in 2019. Consequently, the widespread reliance on cash savings became even more deep rooted.

The Problem

The safety net cash savings seemingly provides isn’t as safe as you think – and you might fall through it.

Why?

It is prudent to hold 3 – 6 months of net salary as an emergency fund to cover unexpected bills, illness or job loss. However, relying on cash over the longer term might feel safe, but inflation eats away at the buying power of your money, therefore when building a nest egg for your future, you should consider wider investment options to protect against inflation.

In September 2021, the Financial Conduct Authority identified 15.6 million UK adults had investible assets of £10,000¹² or more; 37% of which hold their assets entirely in cash. As a result, they launched a campaign to tackle investment harm. This strategy focused on increasing customer confidence in investing and aimed to tackle scamming and the persuasion of people to invest in high-risk products.

In a society that values savings and assets above all else, how can you lose your reliance on the ‘comfort’ of cash savings?

Returns from cash remained stable yet low compared to investments in stocks and shares which made initial losses in the first few years, although the returns were significantly higher in the longer term.

Although there are no hard and fast rules to investing, with advice and guidance from a qualified Independent Financial Adviser (IFA) you have a good chance of growing your investments in the longer term.

1.https://www.rateinflation.com/inflation-rate/uk-inflation-rate/#:~:text=The%20Consumer%20Price%20Index%20for,%25%20for%20the%20previous%20month

2 – 4.https://www.bankofengland.co.uk/knowledgebank/will-inflation-in-the-uk-keep-rising#:~:text=Inflation%20in%20the%20UK%20is,2%25%20in%20around%20two%20years

5 & 6.https://www.bankofengland.co.uk/monetary-policy-report/2022/may-2022

7.https://www.thetimes.co.uk/money-mentor/article/best-savings-accounts-in-2022/#will-savings-interest-rates-go-up-in-2022

8 – 11.https://www.whatinvestment.co.uk/are-cash-isas-worth-it-2619644/

12.https://www.ftadviser.com/investments/2021/11/18/is-cash-really-king/?page=2

13 – 17.https://www.barclays.co.uk/smart-investor/new-to-investing/before-you-start/should-you-save-cash-or-invest/

Lloyd & Whyte (Financial Services) Ltd are authorised and regulated by the Financial Conduct Authority. Registered in England No. 02092560.  Registered Office: Affinity House, Bindon Road, Taunton, Somerset, TA2 6AA. It is important to take professional advice before making any decision relating to your personal finances. The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Information within this article is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only.  We cannot assume legal liability for any errors or omissions it might contain.