Interest rates have now risen for the 10th time in a row, meaning that banks are paying you more on your savings than at any point in the past decade. At the same time, the markets are performing well, with the FTSE 100 hitting an all-time high at the beginning of February.
You may be wondering, with interest rates rising, whether it is better to keep your savings in cash or in investments. The truth is, regardless of the short-term economic noise, the right decision depends on your personal situation and financial goals.
However, there are things you should consider in order to mitigate the impact of inflation, which is increasing day-to-day costs and decreasing spending power weaker.
Keeping it in cash
Interest rates are rising, yes, but they are still being drastically outstripped by inflation. At the time of writing, the Bank of England interest rate is 4.25% and inflation stands at around 10.4%. There have been hints that interest rates may rise again in May, so determined is the Treasury to reduce inflation.
This means that, although your savings may be enjoying an interest rate of 4.25% before tax, its spending power has already dropped by around 7% in real terms. In the future, if inflation were to come right back down, you may find that this gap narrows. However, as a general rule, cash savings will lose spending power over time.
According to the Bank of England’s inflation calculator, goods or services that cost £10,000 in 1990 would cost around £24,000 today.
Of course, it is important to have access to cash savings for short-term spending plans and emergencies. Speak to your Financial Planner, UNIQ Family Wealth to ensure that you are getting the best deal on your cash savings and taking advantage of the interest rate rise – some banks have passed on the rise, whereas others have not.
Is investing better than saving?
There is no definitive answer to this, as there are benefits and drawbacks to each and the appropriateness of either will depend on your circumstances. In general, it is advisable to have a mixture of both – your financial adviser will be able to talk you through this with regard to your specific needs and situation.
One of the key benefits is that, unlike savings, which can only grow at the fixed rate of interest, investments have the freedom to grow and compound interest over time in response to the markets. However, they can also lose value. The longer your money stays invested, the more likely you will see the benefits of growth.
Investing can be an effective method of growing your wealth in the long term – it should not be used as a short-term savings solution.
What can I do?
A good financial adviser or planner will be able to create a plan that includes an appropriate balance of savings, investments, and other solutions in order to help you live the life you want.
If you are worried about the effect that inflation may be having on your savings, please do get in touch with us and we will be happy to talk things through with you.