Saving used to be prudent. Putting cash away to deal with emergencies, or to build up a cash sum for anything from a deposit on a first home to our old age made sense.
Then came the financial crisis, followed by low interest rates, and Covid, followed by rates that were so low as to be almost non-existent.
But now, interest rates seem to be rising on some savings accounts. At Continuum we are looking at whether it is time to look at traditional savings again, or if a savings account is a luxury that you simply cannot afford.
The Covid savings paradox
Covid had two distinct effects on savings. It meant a global standstill, with central banks around the world forced to slash interest rates to prop up national economies. The low central bank rates had an immediate effect on bank savings accounts, pushing returns that were already low lower still.
Low returns on our cash is bad enough. It is made worse by inflation – the familiar experience of rising prices, which is itself running high partly as a result of the disruption to manufacturing supply chains. This is now forecast to hit 5% in the next few months, meaning that each pound we put away is worth just 95p in terms of spending power in a year’s time.
But the same lockdown also meant that some of us became accidental savers. In the UK more than six million employees found that working from home meant they saved the cash they would have spent on going out or commuting.
So many of us are faced with a paradox. We have cash which we want to put to work as savings. But low interest rates not only mean that savings accounts generate a poor return they cannot keep pace with inflation. It means putting money in a savings account means watching it lose its real value.
But is that about to change?
Savings account rates are starting to improve
Savers may be excited by the news that savings rates have at last started rising. But it may be premature to start thinking about taking a pile of cash around to your bank or building society. The market leading easy-access accounts can now still only offer in the region of 0.6%.
Putting your money away for longer can increase your returns, with some five year fixed-rate accounts offering 2%. Locking your money away for five years is a major commitment, especially when during this time rates are likely to increase further.
Acting now could leave you stuck with an account paying 2% when you could be getting a much higher rate elsewhere, and there are likely to be substantial penalties for closing fixed-rate accounts early.
Plus, of course, there is still the problem of inflation eating into your savings faster than interest payments can build them.
It is looking increasingly likely that the Bank of England will increase the Bank Lending rate in the near future. But this may not have an immediate effect on the returns from saving accounts, or even on throttling back inflation.
So what should you do?
If you need instant easy access to your money you may have little alternative to a traditional savings account. It always makes sense to have an emergency savings reserve, of between three and six months of your usual income.
But if you want to put your money to work for you and to grow, the answer may not be savings at all – but investment.
The difference is simple. With savings, your cash stays as cash. With investment, your cash is used to buy something, often including stocks and shares. These are relatively easy to buy and sell and can be carefully selected for risk. They will rise and fall in the short-term, but if you invest carefully for a few years, you have an excellent chance of riding out these ups and downs and taking advantage of long-term growth in the markets.
Ready to become an investor?
Whether you are worried about inflation or simply want to make the most of your money, investment could be the answer. See how we can help you become an investor.
Starting investing can seem a big step, but with help from the Continuum team, investing – in a tax-efficient ISA – can be as easy as saving. We can help you select funds where your money will be invested by expert managers with the aim of providing the growth or the income you need.
To find out more, simply contact us today.
The Financial Conduct Authority does not regulate deposit accounts.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action
The value of investments can fall as well as rise and you may get back less than you invested.
Equity investments do not afford the same capital security as deposit accounts.