May 26th, 2021

3 strong reasons not to hold too much of your wealth in cash

When times are tough, it can be tempting to hold more of your wealth in cash, since this makes it much more easily accessible if you need it. While doing so can give you a sense of security, it may not be the best decision for your long-term financial wellbeing.

If you’ve been impacted by the pandemic in recent months, and so have increased the amount you hold in cash, read on for three strong reasons why this might not be the right decision for you.

1. Not all the wealth you hold in cash is protected

While it’s important to keep some of your wealth in cash as an emergency fund, holding too much of it in this way can be a risk. Holding wealth as cash is often seen as a safe way to store it, but after a point this is no longer the case.

The reason for this is that the Financial Services Compensation Scheme (FSCS) has an upper limit on the amount it will compensate you for if your bank were to fail. The scheme will only compensate an individual for up to £85,000 worth of losses per financial institution.

However, if you have more cash savings than this amount and your bank or building society was to fail due to an economic crash, you could lose everything over this limit. This is why it’s wise to hold cash in various institutions.

2. Your savings could be eroded by inflation

Another issue that you could face by holding too much wealth in cash is that its buying power may be eroded over time by inflation.

In March 2020, the Bank of England set the base rate, which affects the rate of interest that other banks offer to customers, to just 0.1%. This is a historically low rate and has had a significant impact on savers.

When holding money in cash, you rely on the interest rate to help it to grow, but since it has been set at 0.1% in recent months, many people have only seen a very small return on their savings.

When interest rates are lower than the rate of inflation, as has often been the case in the past year, then savings lose value in real terms. This is because the price of goods increases faster than the rate at which you gain interest on your cash.

The Bank of England’s inflation calculator can be a useful tool for seeing how inflation erodes your savings over time.

For example, if you had £10,000 in cash in 2010 then you could have bought goods and services worth that amount. If you tried to buy those same goods and services now, after a decade with an average inflation rate of 2.7%, they would cost you £13,112.

Furthermore, there is also the possibility that interest rates could go negative in the near future. This would mean that not only could inflation erode the true value of your savings, but you may also be charged a fee just for holding your wealth in cash.

3. Investments typically outperform cash in the long term

As we’ve seen, while holding wealth in cash can give you a feeling of security, it runs the risk of losing its buying power due to inflation. If you want to grow your wealth, low interest rates can make this difficult, which is why you may want to consider investing your cash instead.

As you can see from the graph below, investing your wealth typically leads to much larger returns than cash savings.

Source: Hargreaves Lansdown

According to this data, if you held £10,000 in cash in June 1999 until June 2020 then it would have grown to £19,800. Adjusting for inflation, this would be £12,400.

Alternatively, if you had chosen to invest your money instead for the same period, it would have grown to £43,200, or £28,400 adjusting for inflation.

If you want to ensure that your wealth grows enough to reach your financial goals, you may want to consider investing it. While this does expose it to risk, it also allows for the potential for much greater rewards than if you had saved in cash.

Furthermore, if you want to grow it in the most effective way then you may also benefit from seeking professional advice.

Working with a financial adviser can help you to manage your investments to suit your individual tolerance to risk. They can also enable you to make properly informed decisions, so you can be confident that you’ll be able to meet your financial goals.

Get in touch

If you want to know more about how investing can help you to grow your wealth, we can help. Email enquiries@prosserknowles.co.uk or click here to request a call back from one of our advisers.

Please note:

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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