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Why do people invest?

For some people investing is about generating an additional income now, for others it's about saving for the future

Investing money is important to different people for different reasons - after all everyone has different financial goals. Depending on where you are in life, you may be looking to save for a new house, for retirement or for children or grandchildren. You might also be hoping to generate some income to supplement other earnings or pensions.

Cash accounts are one way of saving for the future, and the interest they generate can provide additional income too. However, the interest rates banks are offering are now so low that the interest often doesn’t even keep up with the rate of inflation.

How inflation erodes your buying power
Average inflation
What £1,000 will be worth in real terms
After... 2.5% 5.0% 7.5% 10.0%
5 years £884 £784 £697 £621
20 years £610 £377 £235 £149
40 years £372 £142 £55 £22

If inflation is higher than the interest rate on your cash savings, prices are increasing faster than your money is growing. This means that the real value of your savings falls over time. With this in mind, it’s no surprise people are looking for alternatives.

One such alternative to keeping your money in a cash account is to invest it in the financial markets. Over time, the financial markets have consistently delivered better returns than cash accounts. History tells us that investments have a better chance of producing a favourable return the longer they are left to grow. For this reason, we always encourage taking a longer-term (at least 5 years) view when investing.

Please remember unlike cash, investments carry additional risks and can fall as well as rise, so you could get back less than you invest. If you are unsure of the suitability of an investment for your circumstances seek advice. You should not use past performance as a guide to future returns.

Next: What do you want from your investments?