So now the bank base rate has risen and expected to rise further, you may be thinking now is the time to start putting your money in cash savings again.
Well think again. Interest rates are being cut and top savings accounts removed as banks get up to their old tricks once more.
There really is only one long term solution to growing your wealth and enjoying retirement.
Why you can’t trust the banks with cash savings
Whilst listening to a FinTech podcast the other day I was shocked to hear that many of the traditional high street banks had cut interest rates on their savings accounts or removed the accounts all together before the recent bank base interest rate rise.
As you will probably know at the start of August the Bank of England raised the base rate from 0.50% to 0.75%. This is the highest level it has been for over 9 years.
According to moneyfacts.co.uk savings data banks such as Halifax, Nationwide and Tesco were all in best buy tables for top interest rates a few months before the rise, but had all pulled their accounts or lowered the interest rates before this latest rise.
There has already been a backlash against the banks for being slow to pass on interest rate rises, but now even if they do they are probably only putting the rate back to where it was before they lowered it.
A very sneaky tactic from the banks indeed!
Of course what is supposed to happen in these situations is that mortgage rates increase, making borrowing more expensive and savings interest rates should also increase giving you a slightly better return on your cash savings.
I suppose I shouldn’t be surprised by this behaviour from the traditional banks. Ever since the financial crises we have been made aware of all sorts of bad behaviour from the banks and trust in the banks is certainly at its lowest point for some time.
So if you are saving into a cash savings account for your future retirement or hoping to use the interest to top up your retirement income, you may want to think again.
Yes interest rates may start rising, but this is likely to be very slow and temporary.
Saving into cash is not a long term solution to grow your wealth or increase your income. There is far better ways to get your money working harder.
When cash savings are a necessity
Now there are times when using cash savings accounts is a necessity.
It’s always a good idea to keep 6-12 months of your core spending in cash savings in case of emergency. This means you can access money quickly without selling investments and worrying about whether it’s a good time to sell in the stock market.
One-off large expenses
If you have a large one-off expense coming up, perhaps a child’s wedding or a new car, it makes sense to keep this money in cash for the same reasons as above.
If you don’t have the confidence or nerves to see your money go up and down in value whilst invested in the stock market then cash savings might be the only appropriate vehicle for you. Even so, I would still urge you to speak with a professional Financial Adviser before you do this just so you have everything explained to you, as low risk means low returns.
Do not use cash savings to grow your wealth
Most of the time saving into cash is no way to grow your wealth.
Inflation, the increase in the prices of goods and services over time is currently 2.5%. Over the long term, the Bank of England’s target and in fact an average rate is about 2%.
You will be lucky if you can find a savings rate at 2% without any catches.
So this means you are losing money in ‘real terms’. Your money is losing its buying power over time and is worth less.
Poor returns over the long term
According to the Barclays Equity Gilt Study, the long term annualised real return from cash over 115 years has been 0.8%.
The real return for equities (stocks and shares) over the same period has been 5.0%.
Yes interest rates might be rising now, but even if they do rise above inflation this will only be temporary as all economic cycles have periods where interest rates go up and then they go down as we enter a recession.
So the best thing to do to grow your wealth over the long term is to invest in ‘real assets’ such as equities (stocks and shares) and property. These types of assets usually hold their own against inflation.
Yes it is riskier than cash in terms of volatility (the ups and downs of the market) but over the longer term cash is far more riskier in terms of achieving a decent return.
Want to know more? Our specialist financial planning software not only tells you what return you can expect from your current savings and investment portfolio, it will also tell you what return you need to get in order to achieve all the things you want to achieve. Please contact us for a free demo.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.