Written by Mark Salter
If there’s something that can put quite a bit of fear in each of us and I’m not talking about witches and zombies at Halloween, it’s the idea and possibility of losing money… and a lot of it.
We all work hard for our money each month and all have a certain level of expenses. Some of us will be trying to save for something special, some will be trying to grow the amount of money we have over time and others will be trying to make their money last as long as they can.
At the current time inflation in the UK is at 2.8% (RPI) but the interest rates payable on cash savings accounts is significantly lower. Even if you regularly switch your cash savings to the very best savings accounts, you’ll be lucky at the current time to get higher than 1.5% from the very best online savings accounts.
Cash accounts are of course one of the most suitable places to be if you’re saving for your family holiday next year or you have a tax bill to pay in January, but is it the best place for your medium and long term savings or if you’re trying to build up a pot for your retirement?
Let’s consider you had £50,000 in a savings account and inflation remained at 2.8% per annum for the next 10 years and you managed to achieve 1.5% per annum over this same period. Yes, at the end of the 10 years you would now have a larger sum of money, seeing your savings increase to just over £58,000, but in 10 years’ time the purchasing power of this money would have fallen by £7,875 as you’d need £65,900 of savings to buy the same amount of goods.
Although you may not see this as losing money as you’ve got more than you started with, the purchasing power of your savings have been falling year on year due to inflation. Not a good idea if you’re trying to build up savings so you can help your children or for your retirement.
But what about the horror stories of investing in the world stock markets or the bond markets? What happens when one day you wake up and you’ve lost half of your pot? With this scary possibility why would anyone even consider investing? How could you sleep at night with these frightening thoughts going through your head?
Yes, unfortunately the world stock markets and the bond markets do have crashes and down years and can be blood curdling at times. However, those investors who have a well-diversified investment portfolio and a strategy that they can live with have historically, over most 5-10 year periods, achieved greater returns than leaving their money in a cash savings account.
It seems those who are most frightened by the markets and investing for the future are usually those most unfamiliar with the topic or taking too much risk with their hard-earned money. Which absolutely makes sense as most of us are fearful of things we don’t know about, aren’t familiar with or can’t control.
At FFP an important part of what we do as Financial Planners is to educate our clients on investing and build personal investment strategies centred around them and their plans for the future.
Speaking to a Financial Planner should help ease your fears and put a spell on those scary and frightening thoughts so you can concentrate on enjoying life with the knowledge that your finances are being well looked after.