Having a cash savings account may seem like a safe and sensible choice, but inflation generally rises faster than interest rates over the long term. So, is investing actually the better option?
Inflation occurs when there is a general increase in the prices of goods and services over time. It means that, in the future, you will be able to buy fewer things with the same amount of money you will spend today.
Although the current rate of inflation is still higher than the Bank of England’s target of 2% (following unprecedented levels over the last couple of years), it has predicted that inflation will fall further this year, which could see interest rates cut, edging more towards typical levels that we are used to seeing.
Investing can be key to beating the levels of inflation, however it is worth noting that all investments carry a degree of risk as values can fluctuate depending on various external factors. Speak to a financial adviser if you are unsure about where to begin and would like to learn more about investments and investing safely.
The impact of inflation on cash savings
Generally speaking, when it comes to combating inflation, relying solely on cash-based savings accounts is not usually the most effective strategy.
Although there are favourable interest rates on savings accounts available at the present time if you shop around, over the longer-term the rates offered by providers on cash savings accounts and ISAs are typically lower than the rate of inflation. This could result in your savings being worth less in the future.
For example, if you had £10,000 in an account with a 5% saving rate, after a year you will have £10,500. However, if the rate of inflation is 8%, you would need £10,800 for your savings to have the same value they started with.
How investing can help
If you plan on saving for the long term (usually defined as five years or more) then choosing to invest could be the best option to avoid the negative effects of inflation. Investments usually give a higher rate of return than savings accounts; as such, investing in assets that produce a higher rate of return than the rate of inflation can help to secure your future financial wellbeing.
Our top tips for investing safely
Like many financial decisions, investing is not without risk, and it is always important to proceed with caution when considering investments. Speaking to a qualified, independent financial adviser at the beginning of your investment journey will help ensure you get off on the right foot.
So, how can you invest safely?
1. Diversify your investments
It is important to diversify your investments to make sure you are not relying on one specific type of asset class. Diversified assets include a mix of equities, bonds, and property, and each will perform differently based on the current economic environment. By keeping a diversified portfolio, you can ensure your investment remains strong, even in periods of high inflation.
2. Drip-feed your money in
To minimise losses in uncertain times, it can be beneficial to drip-feed money into your investments. By investing in small amounts at regular intervals, you will sometimes invest when the market is high and sometimes when it is low. By investing gradually rather than in one go, you are more likely to smooth out the ups and downs of the market.
3. Keep some cash savings
Despite interest rates on cash savings typically being lower than inflation, it is important to always have some money set aside for emergencies that you can access easily. If all your savings are tied up in investments, you may be faced with a crisis that requires you to cash them when markets are down, resulting in you losing money.
If you would like to learn more about investing safely and how you can utilise investments to beat inflation, please contact the George Square team.