Should I keep my money in cash or invest it? 2 important factors to consider

By Chancellor

When the Bank of England (BoE) increases or lowers its base interest rate, banks and building societies tend to do the same.

In the period between December 2021 and October 2023, the BoE has raised the base rate from just 0.1% to 5.25% in an attempt to curb rising inflation.

This means many lenders have also upped the interest rates they apply to loans, and banks are offering higher interest returns on savings accounts too. Indeed, Moneyfacts reports that as of 25 October 2023, savers can secure an up to 5.3% interest rate on an easy access savings account.

Crucially, while interest rates have been rising, the stock market has experienced significant volatility – and many people’s portfolios have experienced annual losses as a result. I

With this in mind, you could be wondering: “If interest on cash is high, and markets are rocky, why should I bother investing?”

Continue reading to find out two key factors to consider when deciding between cash and investing.


1. Your cash is likely to lose the race against inflation in the long term, but an investment portfolio could be a more worthy opponent

Understandably, many people choose to keep their wealth in cash, as they deem it “safer” than investments. After all, there’s little to no risk of losing capital in a cash fund, whereas most investments carry some loss risk.

When combined with the potential to see more than a 5% interest return on your cash, it’s clear to see why, on the surface, cash seems like the best option.

Sadly, the “safe” allure of cash can lull you into a false sense of security – and we’re going to explain exactly why.

It’s important to understand that one of the key reasons that the BoE hiked the base rate in the first place is that inflation rose sharply after the Covid-19 pandemic began.

The Office for National Statistics (ONS) reports that after reaching a 40-year high of 11.1% in October 2022, inflation has fallen again to 6.7% as of September 2023. Nevertheless, this figure is still far higher than the BoE’s target inflation rate of 2%.

But no matter how inflation fluctuates, over time it is likely to damage the real-terms value of your cash savings – even if it remained at a lower rate than the current 6.7%.

Calculations published by Unbiased highlight the problem. If you had a savings pot of £10,000, and inflation remained steady at 2.5% a year, in 25 years’ time the purchasing power of your money would be just £5,394.

On the other hand, when you look at how investments have fared against inflation in the past, the story is a little different.

Although there may be some risk of capital loss over any time frame, historically, investing has often outpaced the rate of inflation, helping individuals to continue growing their wealth over many years.

The below graph compares the performance of both large cap stocks and cash against inflation in the period between 1926 and 2022.

Source: Schroders

As you can see, the longer the time period, the more likely it is that investment growth might beat cash returns in the race against inflation.

The most important takeaway here is that over a 20-year period, stocks beat inflation 100% of the time, compared to interest returns on cash that only did so 66% of the time.

As such, if you become tempted to keep everything in cash to lower the risk associated with your savings, it could be helpful to counteract this short-term mindset with a long-term view.

If you’re saving for retirement, your children’s futures, or any other goal that could take years to come to fruition, investing some of this wealth could help you outpace inflation and maintain the spending power of your hard-earned money.


2. A balanced portfolio of cash savings and investments could help you cover all bases

Although investing should make up an integral part of your long-term financial plan, particularly when you’re seeking to inflation-proof your finances, this is not to imply that cash is entirely useless.

Indeed, no matter the interest returns you gain, cash plays a vital role in every wealth plan. The following aspects of your financial plan may be best kept in cash:

  • Your emergency fund. It’s often recommended that each person has between three and six months’ living expenses saved in cash as an emergency fund. If your home or car needs urgent maintenance, or your employment situation changed, for instance, you can then access this money quickly and easily.
  • One-off spending. Each year you’ll have one-off purchases, like a car insurance premium or a holiday, that you may not factor into your monthly budget. Keeping this money saved in a cash account means it’s readily available whenever you need it.
  • A small “overflow” pot. We all know that sometimes exceeding your budget is inevitable – and if you don’t have an interest-free overdraft, keeping a small overflow pot can help you stabilise your current account when you go over budget.

We can help you balance your cash with an investment portfolio that may help to grow your wealth over a period of years while protecting what you have in the present, too.

With an expert adviser at your side, you may be able to plan confidently for retirement, later-life care, or leaving a legacy to the next generation – without worrying too much about the effect inflation could have on your goals.


Get in touch

To learn more about balancing invested assets with cash, email, or call 01204 526 846 to speak to an adviser.

If you’re already a client here at Chancellor, contact your personal financial adviser to discuss any of the content you’ve read in this article.


Please note

This blog is for general information only and does not constitute advice. You should always seek individual advice for your specific needs. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.