Because of escalating living costs, your money might have lost half its value in 25 years.
So, why are we okay with losing money due to inflation, yet the prospect of investing scares us?
Many of us feel some level of safety and security having our financial savings in a bank or building society. There’s something naturally ‘comfortable’ about having a deposit, as well as it being necessary to have cash available in case of emergencies.
Consider your essential outgoings, such as your mortgage, rent, utilities and other mandatory expenses. It’s recommended to have at least three months’ worth of required outgoings on hand if things don’t go as planned. If you have extra cash, it’s also worth considering paying off any short-term debts you may have.
But, if you have more than the equivalent of three months’ worth of expenditure saved up in a bank or cash, are you losing out?
What influence does the rising cost of living have on your savings?
In 25 years, your money might have lost half its value owing to inflation, which is the rising cost of products and services you buy. As inflation increases, the purchasing power of your cash savings goes down.
Let’s say the rising cost of living is 2.5% every year, assuming no interest on your savings, the purchasing power of £10,000 today could be worth just £5,394 in 25 years, so just over 50%.
Inflation paired with low-interest rates is a bad combination.
For many years, interest rates have been meagre. When inflation rises, and your money earns little or no interest, it is practically doing nothing. It’s likely doing ‘worse’ than nothing — its value is decreasing.
The cost of living increased by 5.1% in the year to November, up from 4.2% the previous month and reaching its highest level since September 2011. If the inflation rate stays at 5.1% per year, but the rate of interest on bank savings remains at 0.01% per year, each £10,000 saved will be worth just £9,516 in real terms — a £484 loss. So, it’s worth thinking about whether putting extra cash in the bank is a ‘comfortable’ alternative.
Why are we happy with losing money due to inflation, yet the notion of investing scares many of us away?
Could it be because investing is a foreign concept to us; thus, we avoid it? Is it because we don’t feel we understand it? There are probably many factors, yet like many things, the more you know about it, the far better informed your decisions are.
Yes, there are risks associated with investing, such as the possibility of losing money. However, investing has the chance to grow your money and make it work harder. According to the 2019 Barclays Equity Gilt Study, over the past ten years, investment in the stock market had a 91% opportunity of outmatching cash. Isn’t it at least worth taking into consideration?
But keep in mind, past performance isn’t a guide to future returns. The value of any investment can go down as well as up and it may not return the amount you put in.
You do not have to end up being an investment expert or be rich. These are misconceptions.
Whether you are new or experienced – assistance is at hand. A financial planner will examine your needs, your aspirations, evaluate the level of risk you are comfortable accepting, and balance that with the money you need to maintain your standard of living.
Begin the discussion about making your cash work harder today. At Churchgates, we offer a free initial meeting to discuss your financial situation and see if we can help you. Please get in touch with Samuel Jackson on 01284 701271 to find out more.
