Do I have too much in cash savings?

Category: Financial Planning&Investment

The coronavirus (COVID-19) pandemic has caused massive job losses across the country. But some households have been saving more money than ever [1].

For these households, they have a choice which could have a big impact on their future wealth. This is the choice between saving or investing.

More money to invest than usual

The research reveals 18% of those with £250,000 or more in investable assets have 40-60% of these assets in cash. This group have also benefitted from the lockdown as 35.5% have said they have more money to invest than usual.

During stock market turbulence like we saw last year, cash can seem like a security blanket of sorts. But in the long run, it can do more harm than good to your wealth.

By leaving large amounts of money sitting in cash you could lose out on returns over time. The rates of return on cash accounts are extremely low. The average rates are currently below the rate of inflation.

Long-term return for specific goals

Every investor needs a cash buffer in case of emergencies. However, too much can reduce returns. A good rule of thumb is to save six months of your salary in cash. You can then invest in a spread of different assets which could deliver a long-term return for your specific goals.

Purchasing power over time

You might invest because you are looking to achieve higher returns on your money than you might get from holding cash. You would need to be comfortable with setting your money aside for the long term (at least five years or more).

Potential worries about investing could be the prospect of losing money, or not knowing where to begin. These concerns might make it common for some to hold large cash balances in deposit accounts, especially in times of market uncertainty. However, cash has not been a good store of value in the past. This is due to inflation eating into its purchasing power over time.

As an example, the cost of a first-class stamp has more than tripled just over the last twenty years. Over the last nearly fifty years it has gone up by 2833%!

If you have excess cash balances, you should consider how to protect and grow your capital to meet your specific needs. Investing does, of course, carry its own risks but a robust portfolio, tailored to your requirements, should protect the purchasing power of your money over time. If you want to talk about anything, feel free to book in a free no-obligation chat here.

[1] Quilter research of 2,005 UK adults aged 40+ carried out by Toluna. According to ONS figures, over-40s hold 90% of the UK’s savings.

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