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  • Is your cash working hard enough? 3 things to consider

    With rising inflation and low interest rates, it’s important to make your money work harder. We take a closer look at why and how you can.

    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.

    Knowing what the best option is for your hard-earned money isn’t easy.

    Should you invest in the stock market? Are you better off with the security that cash savings offer? Or perhaps a bit of both?

    With so many options to explore, sometimes it can be easy to do nothing.

    It could explain why more than one in five of people* keep at least some of their savings in a standard current account. These accounts earn little-to-no interest and savers risk seeing their money waste away – thanks to inflation.

    As the cost of living continues to rise, here are some factors to consider when managing your cash savings.

    *Survey of 2,000 people by Opinium for HL in September 2021.

    The article has information to help you make the most of your money. But it isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice.

    Stock market trumps cash

    Interest rates and stock market returns were once a tightly contested battle.

    But since the financial crisis in 2008, interest rates have been kept ultra-low which has helped stock market returns trump cash over the long term. Hoarding too much cash can leave your overall portfolio returns struggling to keep pace with the wider market – this is known as ‘cash drag’.

    To help visualise this theory, imagine running a marathon wearing steel boots or driving a car with the handbrake on. It’s going to hold you back and you’ll reach your end destination a lot slower, or maybe not at all.

    The graph below illustrates this further.

    Global stock market returns vs cash savings returns

    Past performance isn’t a guide to the future.

    Source: Lipper IM, to 30/11/2021. Interest rates based on the average instant access rate over the last ten years.

    The above shows investing entirely into the stock market has delivered the best return. This makes sense as investing carries more risk than cash.

    When looking at the stock market performance over the long term, it might seem like plain sailing. But there will always be some bumpy times along the way and of course, nothing is guaranteed. Unlike cash investments can fall and rise in value so you could get less than you invest.

    That’s why it’s important to weigh up how much risk you’re comfortable taking and your investment goals. This should help you decide if and how much to invest. We think investing as much as you can – for as long as you can – is a good strategy to achieve a better financial future.

    If you’re new to investing or perhaps less confident dipping your toe into the market, you could think about starting small. Investing little but often means you can gain a better understanding around financial markets, how they work, all while gradually adding and hopefully building, the size of your investment pot.

    Remember, it’s important to keep aside a cash buffer for unexpected emergencies – around three to six months’ worth of expenditure is about right. Any planned spending in the next five years, like home improvements or family holidays should also be held as cash.

    More on building a cash buffer for unexpected emergencies

    Inflation – the monster under the bed

    Inflation is a measure of how much the purchasing power of money is eroded over time.

    £100 in today’s money buys you less than it did five, ten or sixty years ago. Think things like the price you pay at the checkout for a pint of milk, or more recently the cost of fuelling your car.

    Rising prices is mostly bad news for both businesses, consumers, investors and savers, but the latter definitely feel the burden the most. Let’s look at an example.

    Purchasing power of £100 over time

    The impact by not beating inflation over the long term can be financially damaging – as you can see from the above. Inflation has eroded the purchasing power of money by more than 95% over a 60-year period.

    While it’s unlikely that double-digit inflation from the 70s and early 80s will return any time soon, nothing is guaranteed. Inflation can quickly spiral out of control.

    The Bank of England (BOE) have the job of keeping inflation at bay, with a target of 2% each year. That’s been tougher than usual over the last year or so. UK inflation roared to 5.1 % in November (its highest rate over a decade), beating the BOE’s expectation that the inflation rate would not rise above 5% until spring next year – a stark reminder to make your money work harder.

    Low interest rates – banking on a rate rise?

    Leaving wads of cash dormant in your local high street bank account, with the hope interest rates will rise sometime in the future, isn’t exactly making your money work harder.

    Interest rates (UK base rate) have been suppressed below less than 1% for more than a decade. Savers in ‘wait and see’ mode, holding out for interest rates to pick back up, have often been left disappointed in recent years – especially now as inflation is starting to rear its ugly head.

    The BOE raised interest rates from 0.10% to 0.25% in December to try to tackle the risks of inflation. And it’s widely expected they’ll continue to rise into 2022, however, any future rises are likely to be modest at best rather than wholesale changes. It’s also worth remembering that banks are never in a rush to pass any changes onto consumers, so savers could be left with further disappointment.

    If you’re set on riding it out for a potential rate rise, it’s important to make sure you’re getting the most you can from your cash savings. Online platforms, like Active Savings, could offer an easy and convenient way to achieve that goal. You can choose a variety of different cash savings products from different banks and building societies, all through one online account.

    Remember though, high street banks offer instant access accounts which allow immediate access to your money. Active Savings offers easy access savings, so withdrawals usually take one working day.

    Want to know more about the future for interest rates? Tune in to our recent podcast to gather the views from our experts.

    The Switch Your Money On podcast from Hargreaves Lansdown

    Stream here using the Spotify player, or open with your preferred podcast app using the buttons below.

    This podcast isn’t personal advice. If you’re not sure what’s right for you seek advice. Investment rise and fall in value, so investors could make a loss.

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    Ready to switch your money on?

    Life can get in the way. This often means prioritising time to spring-clean our finances gets put to the bottom of the ‘to-do’ list. But as we approach a new year, now could be a great time to change that.

    If you need an easy and convenient way to invest, investing in funds could be a great option. This is where professional fund managers make the underlying decisions and choose a selection of investments.

    The Wealth Shortlist is a list of funds that our experts believe have the greatest performance potential. The list contains both actively managed and passive (index tracker) funds, which are broken down across a range of different sectors and geographies, so there’s something for everyone.

    Remember though, it’s important that your investment portfolio is backed by diversification. It works best when your money is smartly spread across lots of investments. The Wealth Shortlist is pieced together with diversification in mind – lots of the funds on the list offer something unique, which means they often complement one another.

    Investing in funds isn’t right for everyone. All investments go down as well as up in value, so you could get back less than you invest.

    Before investing it’s important to check the fund’s objectives align with your own goals, understand the fund’s specific risks and if there’s a gap in your portfolio for that type of investment. You’ll also need review your investments regularly to make sure they’re still right for your circumstances – we think once a year is about right.

    Learn more about the Wealth Shortlist

    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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    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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