The dangers of cash in times of high inflation
Is holding cash really a “risk free” investment?
You can’t watch or listen to any news channel at the moment without being submerged in gloom about how much you will pay for your energy bills this winter and beyond.
On the other hand, has anybody bothered to mention that, if you have a significant amount of cash sitting in a high street savings account that has not increased its rate to reflect the recent increases in interest rates (and many haven’t), then the opportunity cost of not moving to an account which offers at least 2% per year might be costing you more than the entire increase in energy bills that we are all being told to be so afraid of.
Moving a large cash balance to an account paying a competitive return is maybe also just the start of a conversation about the wisdom of holding large cash balances, especially in times of high inflation.
Holding cash means your money is losing value
While keeping your money in cash might provide some comfort when markets are volatile, holding too much cash in the bank, even at a reasonable interest rate, could do substantial harm to your long-term financial health. With inflation flirting with 10%, holding cash means that your money is losing significant value in real terms.
Rainy-day cash fund
It’s normally a good idea to have a rainy-day cash fund that can cover between three- and six-months net income. If you do feel the need to hold an amount greater than that, then at least think about how likely you are to need instant access, as accounts with limited or fixed term access will pay a better return.
Don’t forget that large cash savings may also attract tax on the interest you make. There is a Personal Savings Allowance of up to £1,000 that basic-rate and higher-rate taxpayers can benefit from. However, additional-rate taxpayers will pay tax at 45% on any interest earned.
Returns on assets such as equities outweigh those from cash over the long term
Making sound financial decisions isn’t always easy and a volatile stock market can cause increased stress and anxiety. Unfortunately, you can’t enjoy the highs without experiencing a few uncomfortable lows and many studies have proved that, over the long-term, returns on assets such as equities far outweigh those from cash.
By better understanding the nature of risk and taking proactive steps to manage those risks when you invest your money, you are better able to meet your financial goals.
If you would like to discuss then please get in touch, we are always here to help.
The value of investments may fall as well as rise. You may get back less than you originally invested.
Tax treatment varies according to individual circumstances and is subject to change.
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