As you plan for retirement and work towards other financial goals, you may need to consider different ways to hold and grow your wealth.
For example, you could use a cash savings account to generate interest over time, or you might invest your wealth instead. Both options could play a useful role in your financial plan, and finding a good balance between them is important.
However, a new survey found that UK adults collectively hold savings worth £430 billion that could be invested instead.
Read on to learn more about this £430 billion “investment gap” and why you may want to avoid holding too much cash.
UK adults hold £430 billion worth of “possible investments” in cash savings accounts
Saving an emergency fund is a useful way to build financial resilience as it means you can pay for unexpected expenses such as home repairs without relying on expensive borrowing.
Once you have an emergency fund, you may want to invest any surplus wealth instead of holding it in cash savings because you could generate more growth. However, new analysis from Barclays found that many savers aren’t doing this.
According to the research, individuals who already have more than six month’s worth of income in savings hold an additional £430 billion that they could be investing.
Essentially, this means that, even though they already have an adequate emergency fund, they’re missing an opportunity to invest by holding more wealth in cash savings.
The reasons for this vary and when asked why they didn’t invest these funds:
- 21% said they didn’t have the knowledge
- 24% believed investing was too complicated
- 43% believed investing was too risky
- 74% didn’t know what type of investment was most suitable for them
- 63% wanted help comparing investment products.
If you fall into this “investing gap” and hold too much of your wealth in cash, it may be more difficult to achieve your financial goals.
Here’s why.
Cash interest rates could fall soon
High inflation and the cost of living crisis have never been far from the headlines in the last few years. According to the Office for National Statistics (ONS), inflation reached a peak of 11.1% in October 2022.
In response, the Bank of England (BoE) increased its base rate – the interest rate it charges other financial institutions – to control inflation. This increased the cost of borrowing, meaning that consumers had less disposable income. Additionally, it made saving more attractive and, as a result, consumers spent less and this slowed price rises.
Consequently, we’ve seen a period of high interest rates over the past few years. For example, Finder reports that the average interest rate on a one-year fixed-rate Cash ISA in October 2021 was 0.41%. A year later in October 2022, the average interest rate had risen to 3.35%. The following year, in October 2023, it reached 5.48%.
As a result, cash savings may be more attractive because you could generate more interest than you would have done previously. You also don’t adopt the same level of risk you would when investing.
However, interest rates may not remain at their current levels in the future. The BoE already reduced its base rate to 5% on 1 August 2024 after inflation fell to the annual target of 2%.
While the base rate remained at this level on 19 September 2024, and inflation has risen again by a small amount, there is a chance that interest rates could fall again in the future.
If this happens, cash savings interest rates are likely to fall too. In fact, figures from Finder show that the average interest rate on a one-year fixed-rate Cash ISA had already dropped to 4.51% by May 2024.
With interest rates being reduced, you might find that your cash savings are less likely to generate the necessary growth you need to achieve your financial goals.
This could be especially true when you consider the effects of inflation.
Inflation could erode the real-terms value of your wealth
Inflation can affect the real-terms value of your wealth by reducing the spending power of your savings.
For example, imagine that you put £1,000 in a savings account with a 2% interest rate a year ago. You would now have £1,020.
Yet, if inflation is 5%, the same goods and services that cost £1,000 a year ago now cost £1,050. So, even though you’re generating interest on your cash savings, you can’t buy as much as you could before, and the real-terms value of your wealth has fallen.
That’s why it’s important to generate growth that beats inflation, and this could be challenging if you hold too much wealth in cash, even when interest rates rise.
The following graph compares average interest rates with the rate of inflation between 2014 and 2024:
Source: Finder
As you can see, even when interest rates rose significantly, inflation was still higher much of the time. So, if you held a large amount of wealth in cash savings during this period, it would likely lose spending power.
This may be less of an issue if you’re saving for short-term goals such as a holiday or a new car and need to access the funds in the next few years. However, if you want to build wealth for the future, you may want to consider investing instead.
Investing may offer higher long-term returns than cash
Investing may help you generate higher long-term returns, meaning you could beat inflation and grow your wealth in real terms.
For example, Finder reports that the highest interest rate on a one-year fixed-rate Cash ISA between 2011 and 2024 was 5.48%. Yet, interest rates were considerably lower for much of this period.
In comparison, figures from Curvo show that the FTSE All-World index – an index of large and medium companies from around the globe – showed annual growth of 10.12% between September 2003 and June 2024.
While past performance doesn’t guarantee future returns, these figures suggest that investing could generate more growth than cash.
So, while it is typically beneficial to hold some wealth in cash savings as an emergency fund or to save for short-term goals, you may want to consider investing more of your wealth. This could mean that you’re better able to achieve your dream lifestyle in the future.
Get in touch
We can support you in building an investment portfolio that is suitable for your goals and attitude to risk.
Please give us a call on 01276 855717 or email info@braywealth.com today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
Past performance is not a guide to future performance and should not be relied upon.
Approved by the Openwork Partnership on 03/10/2024
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