Does your 'future fund' have the right balance?
Understand the importance of distinguishing between cash and investments in your 'future fund' and the significant impact this can have on long-term wealth.
Published on 15 Jan 20244 minute read
Saving for the future is an achievement in itself – particularly at a time of squeezed household budgets. So you need to make sure your savings are working as hard as possible to secure your long-term wealth – and making a clear distinction between cash savings and stock-market investments is key.
Cash savings – an overview
Cash savings are important. Cash in a savings account is ‘safe’. You know how much you have and how close you are to your savings goals, and you can access your money quickly. Everyone needs a rainy-day fund to draw on in emergencies. Shorter term goals such as buying a new car or an expensive holiday are also best saved up for in cash. But holding too much cash can have a detrimental impact on your finances – something we’re seeing clearly thanks to inflation.
How investing puts your money to work
When you buy a company’s shares you provide capital to help that company grow. If that capital is used well, the company can invest in new products and services, and employ more people. This is important for the well-being of global economies - growing companies create jobs and boost prosperity.
Investors benefit from the company’s growth and are entitled to a share in its profits. This is usually paid via dividends or reflected in higher share prices. Equally, companies can raise prices to reflect higher input costs, and this can provide returns with some protection against inflation.
Of course, investing isn’t without risk. Companies can mess up. Their products might become obsolete. Their management could make poor decisions. These sorts of difficulties are not always predictable, which is why it’s important to select investments with care and hold a balance of different companies.
However, in spite of these risks, over the longer term, investing has typically delivered higher returns than cash saving.
Analysis by Credit Suisse (as at February 2022) shows that over the last 122 years, global equities have provided an annualised real (after inflation) return of 5.3%. This compares to just 2.0% for bonds and 0.7% for cash.
Remember, past performance is not a guide to the future. The value of investments can fluctuate, and you could get back less than you originally invested.
Do you know how much you need for your future fund?
Both cash savings and investments have a role in your future fund. One key difference is that cash in a savings account is vulnerable to losing value through inflation but there is a very low risk of losing your original capital, whereas invested capital has historically offered better protection against inflation, but there is a higher risk of losing capital. There is also an opportunity cost to holding cash – you lose the potential for your capital to grow above inflation.
This means you may need to save more to achieve your long-term goals. To achieve a pension pot total of £500,000 did you know:
- If you invest £1,500 a month at 0.7% (the average return on cash savings), it will take you 26 years to achieve this goal
- If you can bump up that growth rate to 5% (the long-term average for the stock market), it will take you just under 18 years before charges, and longer after charges are taken into account
These figures are only examples and are not guaranteed.
Investing is necessarily long term. Companies will go through difficult patches (even the best umbrella salesman struggles in a heat wave), the economy will shift and they will find it easier or harder to make money. As an investor, you need to be able to ride out these periods, so should look at stock-market investment over a five-to-10-year time horizon.
One thing to be mindful of is that cash savings and investment are often lumped together as part of a ‘future’ fund. But, in reality, they do quite different things for your wealth over the long term. It is important to balance both elements to ensure the resilience of your savings over time.
Speak to a Bestinvest Coach about your savings and investments – for free
A conversation with an expert can help clarify your plans. That’s why we offer free 45-minute coaching sessions with a qualified financial planner. They’re quick and easy to book online so why don’t you take advantage of one?
 Credit Suisse Global Investment Returns Yearbook 2022, Credit Suisse, 24 February 2022.
This article does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
The value of an investment, and any income from it, may go down as well as up and you may get back less than you originally invested.
Past performance is not a guide to future performance.