The forgotten asset
Is cash really king?
Important - Active Savings helps you make your own decisions and is not personal advice. Fixed term products generally only allow access to funds at maturity. Inflation reduces the future spending power of money.
Over the last 10 years, cash has been trashed by the longest period of ultra-low rates in living memory. But despite its low returns, it still has some advantages.
I’ve always suggested having an emergency cash supply, with around six months' income in it. It’s there partly as a fall back in case of emergencies – like a roof repair or a new boiler – or to support you while you make a career change.
But beyond that, cash gives you choices. You’ve got the ability to take advantage of what might be a good value share or fund. Or it may be that you want to keep some powder dry and not commit all your money to the stock market, providing stability and a dampening effect in the less predictable times.
Sarah: The interest rate went up in August - has that filled you with any confidence about the interest rate you'll be able to get on your savings?
Bryn: No, nothing at all. They're not going to pass it onto savers anyway are they? No, no didn't inspire me to do anything I'm afraid, I just went 'oh'.
Simon: I think you end up doing a lot of research to try and find the best return for your cash, if you're holding a large amount of cash. If you're holding a really large amount of cash I think you need to do a lot of research, because it's very difficult to get a decent cash return out there.
Sarah: The interest rate went up 0.25% in August which was great news for savers who have been waiting for a rate rise for a long time. The bad news is that this actually hasn't filtered through into the amount that a lot of savings accounts are paying, which means that people aren't getting the increase in the rates that they were hoping for.
However elsewhere in the market, so with some of the newer banks, they are actually competing for the business quite hard - so if people are able to shop around they can get a much better rate on their account.
Simon: I don't think there's an easy answer and I think the answer might be slightly different for different people due to their financial position and also their age. I have a couple of younger sons who will take much more risk, because at 23 you can, and I think as you move towards sort of retirement and thinking about it, your cash is increasing. And it is an increasing problem - where do you put it what you do with it?
Bryn: I just keep just couple of hundred pounds in a current account and about once a month I just go through and just transfer my money to a higher saver...higher interest. So I just put it into there, and then it's now building up quite a lot and I'm beginning to think I really ought to do something with this because this is more than I actually need to have in this savings account
Robert: Since I've been involved in investment or even had some cash to use, cash savings account rates have been poor so I've only ever seen it as a tool to invest with.
Mark: Okay so if you're younger probably three to six months of a salary is useful to have. You may be made redundant you may want to do a job change - it's always useful to have a backstop of a decent amount of cash. You might want even more if you’ve got a more cyclical type job or you're a contractor. If you're older I would actually say quite a lot more than that, especially around things like retirement / lifestyle changes - big lifestyle changes where you really don't know how things are going to go for the first year or so. Have more cash, you can always invest more later.
Elaine: The sad part I guess about the savings account is that they're not even earning inflation rate so it's literally eroding in value as it sits there.
Alex: What would the direct risks be from just a cash account?
Sarah: People look at their savings account statement each month and look at the money they're making as pure profit but they're forgetting the impact of inflation so for example you had £100 sitting in a bank account for the last ten years then that would actually only have the buying power about £80 today. So it's important to do what you can to reduce the impact of inflation. One smart strategy is to break your money up into savings pots so you have some available for emergencies in an easy-access account, and then you tie up some more for longer periods in a fixed account which will offer you higher interest in return. In that way you can boost your overall returns.
Robert: I know rates aren't great with it but you know it's the old adage of cash is king and you know, if you haven't got that cash if you haven't got that ability to make decisions and actions very very quickly then I think that is risky.
Mark: So cash is really there to give you loads of flexibility?
Elaine: Yes exactly, yes as and when we find we need it, there is money there for us to tap into.
Robert: A lot of people see cash as the risk mitigator and for no other reason.
Alex: Most of my money is in investment to be honest, I don't hold much cash.
Mark: So within a portfolio well really cash is just part of an overall position. It's an asset class so, again, it really depends on your own feelings towards risk or reward. But if you've got more money in emerging markets, in Asia, you might want to have more in cash. Actually it kind of reduces the volatility of the entire portfolio - once again it gives you optionality. It allows you to invest more money maybe at a later time so the markets take a big dip, it actually allows you to put some more money in so cash is really useful for that so don't think if cash is just being a poor returning asset just because interest rates are low right now think of it as being a big advantage within the portfolio.
This video is not personal advice to invest in any of the investments mentioned. If you are unsure whether an investment is right for you, please seek advice. Active Savings helps you make your own decisions and is not personal advice. Fixed term products generally only allow access to funds at maturity. Inflation reduces the future spending power of money.
It’s also a great parking place until you’ve made decisions and you know what your goals are. Retirement’s a good example of where holding cash could really benefit you. In the past when I advised clients, I found too many in a rush to invest or spend all their money, days after their decision to finish working.
But my view was always to hold a larger amount in cash to begin with, because it takes time to truly work out what your game plan is after retiring. Holding cash gives you that freedom of choice to make the right decisions in your own time. It provides a buffer when markets fall, and gives an alternative income until they pick up.
For lots of people the right strategy could be to divide your cash into instant access and fixed-term savings products, letting you take advantage of accessibility and better rates. Fixed-term products let you lock in an interest rate for a fixed period, usually anywhere from three months to five years. You’ll typically get a higher rate for locking your money away but you won’t usually be able to withdraw your money until maturity.
By strategically using a range of fixed-term products, you can get a much higher average rate. Fixed-term savings can help you find the best balance between having cash for everyday needs, and putting money away for the long term as savings elsewhere.
But even with cash, it’s important to keep an eye on the rate you’re getting, which can be no mean feat if you have a number of accounts with different banks. Just like with investments, the key to executing an effective strategy is having more control over your money – being able to view everything as a whole, and having the ability to move it around quickly and simply.
That's why we started Active Savings, a new service designed to help you manage your cash effectively and make more on your returns.
We know getting a good rate is important, but to really understand why you need to take a look at what inflation does to your spending power.
Personal Finance Analyst
Inflation. It’s always there just lurking, gradually chipping away at your cash. Since 2009, inflation’s meant that the spending power of cash has fallen nearly 20%.
Inflation peaked at over 5% in 2011 and today stands at around 2.3%. Despite interest rates rising above half a percent for the first time in almost 10 years, the Bank of England base rate still sits well below inflation at just 0.75%.
For savers, that means in real terms, you’ll need some really good rates just to stand still.
For those with cash in easy access savings accounts in particular, the rate of inflation means your money will still be decreasing in value. According to the Bank of England, the average easy access account currently pays a paltry 0.2% (excluding bonuses). Fixed term savings accounts can help bridge the gap. By fixing for a year or longer, you can earn over 2%.
But life doesn’t work in neat little annual cycles. A mix of easy access and fixed-term savings can stand you in good stead to ‘body-guard’ your cash from the inflation assassin.
Of course, investments can also give you a good return. But as markets go up and down in value, it’s not guaranteed. And to give you the best chance of seeing those returns, through the peaks and troughs, we usually recommend investing for at least 5 years.
Inflation winners and losers
The CPI (consumer price index, that doesn’t include housing costs) is put together by the Office for National Statistics (ONS) and is broken down into a few categories. To get the overall inflation rate, an average is taken. Here are some of the biggest price hikes and a few which have actually fallen in price (on average, over the years).
Top five biggest winners (% decrease in price between 2005 and 2016)
|Photographic, cinematographic and optical equipment||-90%|
|Information processing equipment||-76%|
|Equipment for sound and picture||-62%|
|Clothing and footwear||-17%|
Top five biggest losers (% increase in price between 2005 and 2016)
|Insurance connected with transport||118%|
|Insurance connected with health and other insurance||102%|
Based on those figures, if you’re a student who lives in a house with a gas boiler, who smokes and drives a fast car, your life is now much more expensive than it would have been back in 2005.
But if you’re a stylish photographer or videographer with a house full of computers and tablets, now’s a comparatively cheap time to be you.
How to take steps to protect your savings from inflation
Our new Active Savings service lets you pick and mix fixed term savings from a range of different banks and building societies, all through the convenience of one online account.
By blending savings of different terms you can create a savings portfolio which offers some protection against inflation.
We’ve already looked at how inflation can hurt savers over the long–term especially if the rates of interest they’re getting aren’t great.
But the right cash strategy could really help you boost the returns you get on your cash savings, while making sure you have access when you need it. And with Active Savings putting your cash strategy into action is simple.
The first step is to make sure you have enough accessible cash in case of any emergencies. Financial planners generally say you should keep three to six months’ worth of expenditure. But once you’ve got an emergency fund set aside, you can look at using fixed-term products to boost your returns. Remember though with fixed term rates you can generally only access your money again at maturity.
Create a savings portfolio
If you have any investments, you’ll know the importance of building a balanced portfolio. The same is true for cash.
Spreading your savings across fixed terms of different lengths is an easy way to boost your overall returns, and staggering the end dates will make sure your money comes back to you regularly.
Take a look at the example below. This saver already has cash set aside for emergencies, and is planning to spread the rest of their savings equally across a range of fixed terms, ranging from one year up to three years.
An example of a savings portfolio
In this example our saver is getting much more interest by spreading their money across fixes of different terms, compared to having it all in a shorter term fix, but will be getting some of their money back after a year in case they need it for anything.
This is just an example. Everyone’s different – your approach will depend on your individual circumstances.
This can be a great approach for someone looking to build up their savings over time.
Say, for example, you have some spare cash each month which you want to save. It’s part of your long-term plan, so you don’t need immediate access to it, but your circumstances might change in future so you don’t want it tied up for too long.
So each month, you save any spare cash you have into a 12 month fixed-term savings product which pays around 2%. After a year you have savings maturing each month, which you can either withdraw or roll over into another fixed-term product.
You have the flexibility to change the amount you save each month and, by using fixed-term savings in this way, you can earn a much higher interest rate than by just using easy access savings.
As before, this is just an example and everyone’s situation will be different. It might be that you add to your savings less frequently, or prefer to use longer fixed terms, but the principle should stay the same.
We can help with your cash strategy
Manage your cash easily with Active Savings. It lets you pick and mix fixed-term savings from typically three months up to five years from a range of different banks and building societies, through the convenience of one online account.
And once you’re set up there’s no forms, no paperwork and no hidden surprises. Just simple, fair saving so you always know what rates you’re getting.
Please note, that Active Savings is an online-only service.
Client case study
“I sold my business in September 2017 and I’m now enjoying my retirement spending plenty of time planning for and travelling the world. When I received a lump sum from the sale, Active Savings was the perfect place to put some of my hard earned spare cash.
I chose to place my money across different fixed terms so that I could happily manage my upcoming expenses. I knew I had a range of different bills to pay in 9, 12 and 18 months’ time, so for me, it was about managing my money to get a better return during this new retirement period. If I hadn’t put my spare cash into Active Savings, it would probably be sat in a deposit account in my bank earning next to nothing.
Working for a living, for life, has its own mind-set. It's all about paying off mortgages and other bills including children. And also saving for the future. Retiring brings a very different mind-set. It’s all about careful planning of your savings and scheduling the spending of the monies you have earned.
The great thing about Active Savings is that HL has done all of the hard work so I don’t have to. It makes the saving part so easy and, in my opinion, fills a great gap in the market. I would definitely recommend Active Savings to anyone looking at a simple and easy way to save.”
The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017 with firm reference 751996 for the provision of payment services. Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are wholly owned subsidiaries of Hargreaves Lansdown plc (company number 2122142).
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