You might have noticed that some of your savings’ accounts are now offering 4% interest with some cash rates for one-year fixed-term accounts going as high as 5%. With this in mind, it would be sensible to consider whether it is better to hold onto cash savings rather than invest.
What is the difference between saving and investing?
Saving means putting cash aside in a secure place such as a bank account where you can more easily access your funds. Investing means taking a risk and purchasing assets that will ideally increase in value and give you more money than what you put in, this is generated over a longer time period.
There are both advantages and disadvantages to saving and investing such as – saving will give you a guaranteed return as you are provided with interest on your balance and investing can potentially lose you money.
In this blog, we look further at the overall advantages and disadvantages of holding cash.
The advantages of holding cash:
- Cash is now offering 4% interest which is an attractive return and will not lose value in nominal terms.
- Cash rates will/should increase as interest rates rise, although this will likely not apply to fixed-term accounts.
- If inflation proves stubborn and interest rates need to move higher or stay high for a while, then cash rates should benefit from this.
- If inflation falls below cash rates, then investors will make gains in real terms.
- Cash can help shelter portfolios from short-term market volatility.
The disadvantages of holding cash:
- Cash rates will decrease as interest rates fall, reducing returns; and providers will likely be very fast to cut rates on products as interest rates come down.
- Yields on bonds are always typically higher than those from cash. The UK 10-year government bond is currently yielding 4.5% and corporate bond markets (debt issued by companies rather than governments) even more than this; closer to 6% for the UK corporate bond market.
- Bond yields will likely fall as interest rates drop and this should increase bond prices therefore adding capital growth. For example, a 1% fall in yields should lead to a capital gain of c.10% for a 10-year bond.
- Cash must be held on account or invested in a money market fund for the whole year to capture the full rate.
- Investing in cash will reduce/remove the participation in any continued market recovery, in bonds or equities. These asset classes have proved to deliver returns ahead of cash rates over the long term. Being out of the market, both bonds and equities, on days when they move up very sharply dramatically reduces the long-term returns for portfolios, i.e. consistently timing the market correctly is impossible. These days often happen when markets are volatile and performing at their worse.
- For cash rates to outpace inflation the rate paid needs to be higher than the inflation level, this is currently not the case with inflation at 8.7% in the UK.
- Falling inflation, which is expected despite recent figures, will reduce the need for high
- interest rates and therefore lower cash rates as these fall.
- Higher interest rates increase the chances of a recession and destabilising the housing market, which would increase the likelihood for interest rate cuts and therefore lower cash rates.
- Some accounts only allow a limited amount to be invested each month, up to a maximum level for the year. Meaning in the first year you will not receive the cash rate on the full amount allowed and only on the amount that is invested each month. This will rate likely be reduced if rates fall.
- Inflation diminishes the value of your money in real terms.
Depending on your financial goals, saving some money in cash makes sense for short-term goals and needs however, investing in the markets could serve you better over the longer term.
To discuss your options please book a consultation with one of our financial advisers who will be able to help determine the best route forward for your personal financial goals.
*Invested capital is at risk *The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.