Is Investing Really Worth It?
Have you ever considered taking your salary, inheritance or any other lump sum you may have received and hiding it all under your bed as cash?
If you have, you are not alone. For many people the idea of keeping money in a ‘safe’ place is the absolute priority and if it’s not hidden under the bed, a cash deposit account with a bank is often considered a good option.
It makes sense, you can’t lose money in a bank savings account…… or can you?
The short answer is yes you can.
One unlikely circumstance where you could lose your money is if the bank becomes insolvent, or what is more commonly referred to as ‘goes bust.’ In the past, a bank ‘going bust’ meant your savings were gone. Times have changed and, with the introduction of the Financial Services Compensation Scheme (FSCS), individual savers are protected on up to £85,000 of cash savings per institution. This is a big improvement on the past but for many, the amount held in a bank savings account far exceeds these limits.
The bank ‘going bust’ isn’t the only potential drawback of cash deposits. Unfortunately, there is another risk that is currently affecting all cash deposit savers, and this is called inflation risk. Inflation risk refers to the purchasing power of money.
Put simply, if you had £100,000 hidden under your bed 20 years ago, you would have had enough money to buy the average UK house and still have a few thousand left over. Fast forward to today and that £100,000 is nowhere near the land Registry £255,000 average house price. All of this is due to inflation.
Currently, banks are not offering a return much greater than under your bed. The UK base rate stands at 0.1% whereas RPI, which measures the change in cost of a basket of goods over the past year, is 4.9%. This means that in terms of what your money buys, savers are very likely to be losing money each year.
Of course, it is still important to have an easily accessible emergency fund held in cash. However, to achieve a potential return in excess of inflation and avoid the ‘real’ value of your money diminishing, investment markets remain a tempting alternative.
As always, professional advice is paramount when it comes to deciding on an appropriate investment strategy between low, medium, and high risk. Regular reviews which take account of changing events are vital if investors are to weather the continually changing investment market environment.George Ide, Investment, News