Has cash lost its crown ?
During all the recent lockdowns people having been finishing off Netflix boxsets, ordering everything under the sun from Amazon and doing DIY. Even with all that spending, it appears lots of people have been saving money too.
The latest Bank of England data indicates that a record £1.7trn is being saved by households in cash, up by nearly £200billion over the last year. That averages out at an extra cash savings of about £7,000 per household over the past 12 months.
All this is good news from the perspective that lots of people have been able to increase their savings during such a difficult period. However, some caution should be taken…
1. The Bank of England estimate over £240bn is sat in accounts paying ZERO interest.
2. Inflation has now started to tick up and currently stands at 2.4% according to the ONS in June 21
So any interest you are receiving which is lower than 2.4% means that over time, your money will be losing value in real terms.
3. Having a store of cash for emergencies is sound financial planning. In our recent blog we looked into this in a little more detail –Cash for a Crisis. What is an Emergency Fund? – Yorwealth. Again it is worth reviewing this, and seeing if the worst were to happen, that you would have sufficient to get by. An emergency fund will always sit alongside any financial plan that your Financial Adviser may create.
4. Often people stay with a Bank or Building society, and never really study whether the interest rates they are receiving are the best available in their circumstances. It is worth shopping around when you’re saving money. Plenty of comparison sites are available on the internet to help you, just make sure it is an independent one!
5. Is a cash ISA a better option to consider? Most people are familiar with cash ISAs and the benefits of tax free interest they generate, however, people are perhaps unaware that each individual also benefits from an amount of annual interest they can receive which is taxed at 0%. This is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Even with a generous interest rate of 1% (and to keep my maths simple) this means you would need to have in excess of £100,000 in cash to breach the £1,000 allowance. Therefore, you might be able to get a better interest rate for your cash savings outside of a cash ISA. This then frees up your £20,000 ISA allowance to invest in other assets such as an equity based portfolio for your longer term investment needs. Of course, with funds already within an ISA, these can also be transferred to an investment ISA, thereby retaining your allowances for the current years too.
6. Are fixed rate investments good value; do you want to tie your money in long term? Is there a risk that interest rates will rise to curb inflation, and you may be tied into what then becomes a poor interest rate? Often cash investors are rewarded with higher interest rates the longer they are prepared to lend their money to their bank or invest (so that the bank can lend this out to others for a profit). During recent times, even a fixed 3 year bond would generate 1.3% pa for 3 years, as opposed to a 1 year fixed for 1% pa. Whether inflation is short lived or around for longer, at that fixed rate you would still be losing money in real terms.
7. Have you considered the implications of any available taxes thresholds or tax reliefs that might help to maximise what you have saved, and ensure it is in the best place from a tax position?
There is plenty to consider when saving your money.
Opinion is divided over whether the current inflationary pressures are a short term issue or possibly a longer term concern. It has become even more important to consider all the options with your savings, and maximise what you have in the most efficient manner.
Quite often the answer can be to carry on doing what you are doing, but it is worth checking some of the above points, and if you are unsure doing some research or speaking with a financial adviser.
Here at YorWealth we offer a complimentary initial assessment of your financial position, so please do get in touch.