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Lesson six: Investing versus cash savings

This lesson gives you the pros and cons of investing and cash savings – i.e. putting money in a savings account that pays you interest.

Cash saving versus investing

What are the pros and cons of each

  Cash savings Investing
Pros

There’s little risk of losing money.

Your money could grow faster than it would in a cash savings account, and faster than the ever-rising living costs (inflation – see below).

You always know how much money you have, so you know whether you can afford what you’re saving for.

If you leave your money invested for a number of years, the effect of compounding means the money you make from investing could also make more money.

Cons

Interest rates on cash accounts rarely keep up with rising living costs.

Your investments can go down in value and you could end up with less than you started with.

You might have to pay in a lot more than you would with an investment account to achieve the same goal.

With most investments, you can withdraw your money whenever you want, although you usually have to leave it for at least a few years to see a good amount of growth. Some investments can be harder to sell – these are known as ‘illiquid’.

In exchange for a higher interest rate, some cash savings accounts make you lock away your money and throw away the key for a certain number of years or pay a fee to withdraw it early. They’re known as ‘fixed rate’ or ‘fixed term’ cash savings accounts.

 

What is inflation?

Inflation is the rate that prices for clothes, food, travel and the like go up. Inflation fluctuates and if it’s high, the interest rate on your cash savings account probably won’t keep up with it. So how much you can buy, or your ‘buying power’, actually decreases – even if your cash savings account balance is going up.

At the moment, no cash savings accounts are keeping up with inflation*. Investing means taking a bit more risk upfront to get potentially more money later – no risk, no reward, right?

Some cash savings are necessary

It’s always a good idea to have some cash savings set aside in case you need them. You don’t want to cash out your investments for an emergency that came out of the left field!

As an example, if you drop your phone in a popular bathroom appliance as soon as you’ve flushed, you might need a new one quickly – especially if you’re on a contract.  

*According to MoneySavingExpert, and RPI inflation for July 2019.

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