Investments vs cash savings

Make your money work for you

Cash savings offer security, but with interest rates low and inflation rising, should you consider investments instead?

Choosing how to save your money isn’t always easy. Deciding whether to do so with cash or investments can have a major impact on your future finances.

It’s important to factor in all the elements that might be important when you’re considering how to make your money work for you. These  include your personal preferences and circumstances, but also how comfortable you are with risk, the potential returns and how much access you’d like to your savings.

Remember your investments can fall in value and you may get back less than you invested. If you’re unsure, seek independent financial advice.

Should I stay with cash?

For short-term savings – those that you’re likely to need within the next 5 years – cash can be a good idea. You’ll almost certainly get back what you put in, and there’ll be added interest on top. So, if you aren’t prepared to accept the risk of getting back less than you put in, cash accounts are probably the answer.

However, cash isn’t necessarily the safe haven it can seem at first.

Why? One reason is that it’s hard to generate a decent return at the moment, because the Bank of England base rate and returns on bank accounts are at a record low level. Another reason is inflation.

Cash versus investing: what are the facts?

When considering cash savings and investments too, it’s important to draw a distinction between the amount you have and its value to you. That’s because inflation – if it runs ahead of interest – causes the buying power of cash and investments’ value to diminish over time.

And the spectre of inflation is currently looming large. The Consumer Price Index was at 2.3% in February, rising from 1.8% in January and reaching its highest rate since September 2013. In comparison, the Bank of England base rate is just 0.25%.

The negative effect of inflation on cash and investment isn’t a recent occurrence. In fact, it has been eroding the spending power of cash savings since interest rates were cut following the financial crash in 20081.

However, in the past, investments – if they are held for the medium or longer term – presented a much better chance of generating a good return.

Indeed, investing over a 5-year period in a 50/50 portfolio of equities and bonds has delivered higher returns than cash in most years since 1990 – but it’s important to understand that the past performance of investments are not necessarily a reliable indicator of their future performance2, so you could end up with a smaller return or even less than you invested.

What is right for me?

Whether cash or investments, the best decision for you will be one that takes into account your aims and personal circumstances.

If you’re saving for short-term goals and are likely to need the money in the next 5 years, you should consider keeping at least some of your savings in cash.

There would be little risk of losing money, but the trade-off for that security is that your savings may not keep up with the cost of living.

If you’re saving for a longer-term goal, where you won’t need to access the money for at least 5 years, investing could be the better option. Even so, it rarely offers a smooth ride, and you are likely to experience ups and downs in the market, which mean that the value of investments could also fail to keep up with the cost of living.

One way to ease this is by investing at regular intervals. This helps to smooth the peaks and troughs of the market .  

It’s important to remember that all investments incur risks, and no matter how long you hold them they could still lose value and perform less well than cash.

But while what has happened in the past might not happen in the future, investments do have the potential to outpace the returns you get from cash and help your savings beat the eroding power of inflation. If you’re unsure about their suitability for you, you should seek independent advice.


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