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How to stop inflation eating your cash

As inflation continues its upward march, the impact on cash savings is devastating. But what can you do when your cash balance is worth 10% less than it was the year before? This article looks at 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 26 Aug 20225 minute read

Forgoing spending today to provide for the future is an achievement in itself – particularly at a time of squeezed household budgets. There is a temptation to see saving as the tough part but if you don’t also make sure those savings are working as hard as possible, this can have a significant impact on your long-term wealth. Making a clear distinction between cash saving and stock-market investments is the key.

Cash has its place

Cash savings are important. Everyone needs a rainy-day fund to draw on in emergencies. Shorter-term goals such as a new car or expensive holiday are also best saved up for in cash. But holding too much cash can have a detrimental impact and this is something we’re seeing clearly today. If you’re getting just 1-2% interest on your savings but the cost of living is growing at 10% a year, the purchasing power of your savings is dropping all the time. This can make a big dent in your standard of living and throw future plans off course.

Investing can put your money to work

When you invest in the stock market, you’re sending your money out to work on your behalf. By buying a company’s shares, you’re providing capital to help the company grow. If that capital is used well, a company can invest in new products and services, and employ more people. This is important for the well-being of global economies; if companies can grow, they bring jobs and prosperity. It should also help investors, who could see the share price – and their capital – grow over time.

As an investor, you’re entitled to a share in the profits and growth of that company. This is usually paid back to shareholders via dividends or reflected in higher share prices. Equally, companies have the ability to raise prices to reflect higher input costs, so returns can provide some protection against inflation.

Of course, investing isn’t without risk. Companies can mess up. Their products may become obsolete, their management teams may make poor decisions. These difficulties are not always predictable, which is why it is important to select investments with care and hold a balance of different companies at all times.

That said, in spite of these risks, over the longer term, investment has delivered a higher return than cash savings[1]. Analysis by Credit Suisse 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.

But remember that past performance isn’t a guide to the future.

Your future fund needs the right balance

Both cash savings and investments have a role in your future fund. 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 it quickly on rainy days. However, cash in a savings account is vulnerable to losing value through inflation, 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.

This means you may need to pay in more to achieve your long-term goals. To achieve an income of £30,000 per year in retirement at 65, you will need a pot of approximately £500,000. 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.

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

At times like this, it can really help to talk through your plans and concerns. 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?

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[1] Credit Suisse Global Investment Returns Yearbook 2022, Credit Suisse, 24 February 2022.

Important information

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.

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