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Is cash more important than ever?

A look at the changing savings market and why you shouldn’t let falling rates affect your financial resilience.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The last year has underlined just how important cash is. There to spring into action when we need it most.

It’s one of the foundations of your financial security.

If there’s one positive from the last 12 months, it’s the way lots of people have managed their money. And used the situation to shore up their finances.

In the six months leading up to the first lockdown, people in the UK were borrowing an average of £951m a month, while saving £4.7bn. This changed dramatically in the six months after. People were saving £14bn a month. And they’d paid back £2.4bn debt.

On the face of it, our finances received the shot in the arm they needed.

But it’s not all good news.

Nearly half of people still don’t have an emergency fund*. And about a third of us wouldn’t survive more than one month without an income.

So what’s the solution?

How much cash should you hold?

There’s no one-size-fits-all number. We think you should keep at least three to six months’ worth of essential expenses in easy to access cash if you’re working. This will help to cover any unexpected costs, like a broken boiler, or any sudden loss to income, like being made redundant.

If you’re retired, you should hold one to three years’ worth of essential expenses.

Holding more when you’re retired is a good idea, because if you need to dip into your emergency pot it could be harder to replenish.

On top of that, you should keep any big expenses you know are coming up in the next five years as cash – things like a new car or home improvements. Keeping it as cash means there’s less risk of your pot falling in value just when you need to access it.

Why are savings rates so low?

That’s thanks to a flood of money going into deposit accounts and reduced consumer borrowing.

The result, record-low rates for savers.

Banks need to balance the money they raise from savings deposits with the amount they’re lending out. The interest rate they offer is an indication of their demand for more deposits.

How to make the most of your cash savings

It’s now harder than ever to get a good return on cash. But you shouldn’t let falling rates affect your financial resilience.

Consider creating a savings portfolio.

The vast majority of money in UK savings accounts is in instant or easy access accounts. But they pay the worst rates.

For savings beyond your emergency fund that you don’t need quick access to, you could consider fixed term products. They typically pay a better rate than instant or easy access products. But the trade-off is you usually can’t access your money until the term ends.

You can normally fix from just a few months up to five years. If you’re really savvy, you can use multiple lengths to make sure you have some money coming back to you when you need it. You might want to time it based on goals you have in life, like buying that new car.

What a savings portfolio could look like for a £20,000 savings pot

This is just an example and is not personal advice. You should choose the products and amounts that fit your personal circumstances. Please remember that inflation reduces the future spending power of case.

Is there more risk putting money with smaller banks?

Big providers, like high street banks, pay some of the lowest rates. Some banks do need to bring in deposits and are offering better rates to get it – you could be surprised by the difference. Often these are smaller ‘challenger’ banks.

As long as they’re authorised, all eligible deposits will be protected up to £85,000 by the Financial Services Compensation Scheme (FSCS). Find out more on the FSCS’ website.

You won’t get that level of choice with your high street bank. And it’s not as hard work as it might sound.

Savings platforms, like the HL Active Savings service, let you to do this with ease. You can access a range of banks and building societies offering easy access and fixed term savings products under one roof.

*HL survey of 2,001 UK adults conducted by Opinium, September 2020.

The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.

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Explore our Investment Times spring 2021 edition for more articles like this.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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