The one unspoken savings risk many take, and how to protect yourself against it

As 2022 marches on, it is understandable that your mind might constantly be on the subject of money. While nobody likes worrying about their wealth every day, even well-off individuals are finding themselves burdened with financial concerns as the cost of living crisis continues.

Indeed, the figures are stark: the Office for National Statistics reports inflation reached 10.1% in July 2022, while the Bank of England (BoE) raised the base rate to 1.75% in August. Plus, the Guardian reports Ofgem’s energy price cap could increase to more than £4,000 in January 2023.

All this to say, if you are putting your finances under the microscope at the moment, you aren’t alone. You may be saving as much as you can now, in order to help cushion any further blows to your wealth in the coming months.

However, if you are routing funds directly into a cash savings account, you could be unknowingly posing a threat to your finances, too.

Read on to find out how cash savings can stagnate your wealth during a time of high inflation, and how one key alternative could prove more constructive in the months and years ahead.

Cash savings are considered “low-risk”, but they could stagnate your wealth during the cost of living crisis

When deciding whether to invest your wealth or place it in cash savings, the latter is often considered “low-risk”. Indeed, investing always poses some risk of financial loss, whereas keeping funds in cash savings can shield them from volatility.

Nevertheless, cash savings can also put your wealth at risk in the long term. During a period of rising costs, the interest earned on cash is unlikely to outpace the rate of inflation.

For example, as of 17 August 2022, the CPI rate of inflation stands at 10.1%. However, according to Moneyfacts, the highest interest available on an easy access savings account is 1.67%.

So, while keeping some money in cash as an emergency fund can be useful, saving large sums in this way could actually reduce its real value over time. As prices rise, the interest your wealth earns while sitting in cash might mean it doesn’t maintain its spending power.

If there are specific financial goals you are working towards, such as retiring at the age you want or helping adult children onto the property ladder, keeping your wealth in cash might make these harder to achieve.

Luckily, your financial adviser can help. We can offer guidance on how to grow your wealth sustainably over the course of your lifetime, allowing you to prioritise your long-term targets.

Investing your wealth with the support of your adviser could help you achieve your long-term financial goals

When you sit down with your financial adviser to discuss your financial plan, the subject of money is often not where the conversation begins.

Indeed, the first and most important topic is that of your hopes and dreams for the future. In an ideal world, how would you like to use your money to support yourself and those you love?

Once you’ve established the what – the opportunities your wealth could provide in future – then you can focus on the how.

While cash savings should make up part of your financial plan, by investing a significant portion of your wealth you could see returns that might help you achieve your dreams in future.

You might be thinking: “the markets are experiencing a downturn at the moment. Why should I invest when things are so unstable?”

The truth is, although the markets are volatile at the moment, investing is a long-term endeavour. If you expect to see your wealth thrive in just a few months, you might be disappointed.

However, by discussing your goals, along with your attitude to risk and your proposed time frame, with your financial adviser, you could be on track to yield the returns you want over the course of many years.

In fact, research from Nutmeg reveals that the longer you hold an investment for, the less risk it poses to your wealth.

The study used stock market data from between January 1971 and December 2021 to track the likelihood of making losses or gains, depending on the time an investment is held for.

If you had chosen a day at random during this period and invested for just that one day, you would have had a 52.5% chance of yielding a profit – similar odds to tossing a coin.

But, if you had invested your money for 65 days, or a quarter, your chances of financial gain would have increased to 66.1%. What’s more, investing for any year between 1971 and 2021 would have generated a positive return 72.7% of the time, while investing for 10 years increased your chances of a profit to 94.15%.

Crucially, the study found that investing for around 14 years or more in that period reduced your chances of losses to zero.

So, if you are concerned about “timing the market” and only wish to invest when things are looking up, think again. In fact, it’s not when you invest, but rather for how long you hold investments, that typically matters most.

Of course, past performance is not a reliable indicator of future performance. It is important to remember that all investments pose a degree of risk to your wealth, and you should never assume you will always turn a profit from the money you invest.

Nevertheless, in a time of high inflation, your wealth could be given a better chance of thriving when invested, rather than stored away in cash savings. By remembering the importance of your long-term targets, you might feel calmer and more confident that your invested wealth is on track to support you and your loved ones later in life.

Get in touch

For advice on achieving your long-term goals through investing, or any other financial matters, contact us today. Email info@chancellorfinancial.co.uk, or call 01204 526 846 to speak to an adviser.

Please note

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.