Money Money Money!
“I don’t want to lose my money” is often one of the concerns that I hear when I talk to clients about investments. However what most clients don’t realise is that is exactly what is happening every year when it is left in a bank or savings account.
How? I hear you say… Let me explain…
In 2020 according to the latest figures from the Bank of England a record £215.3 billion* (as an actual number it looks like this £215,300,000,000) was left in UK bank accounts earning 0% interest. That’s the equivalent of almost £7,800 for every household in the UK not earning a penny! And worse… if you factor in inflation, it’s actually losing money in real terms!
How is that happening?
In 2009 the Bank of England cut interest rates to 0.5%, over a decade later interest rates are at the lowest in the Bank of England’s 325 year history at 0.10%. There were even discussions for the first time ever about introducing negative interest rates! Just imagine, having to pay the bank to keep your money! However the Brexit deal secured at the end of last year has, at least, averted this discussion for the time being.
What is certain is that dismal interest rates look set to continue as the government deals with the financial fallout from COVID-19.
Now more than ever it is important to ensure that your finances and more importantly your savings are working as hard as they possibly can. Leaving your money in a savings account may seem like the safest solution, but with some banks only offering 0.10% (or less) gross interest it may not be the smartest solution!
Let’s show you why…
Let’s assume you have £10,000 in a savings account earning 0.10% gross whilst being a basic rate taxpayer. In 10 years time, you will have earnt £100.45 in interest, that’s just £10 per year!
Doesn’t look great does it but at least it’s a positive return! BUT what happens when we factor in inflation?
Firstly, What is inflation? According to James Chen (former Director of Investopedia) it is “a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time” It is essentially the cost of a loaf of bread or a pint of milk and how much it has increased by on a year by year basis.
The government’s target inflation rate is 2% p.a. Therefore if your savings or investments are not achieving at least the rate of inflation, the buying power of your money is diminishing. You may still have the same amount of money in your account but what you can buy with that money is less than it was 12 months ago.
So let’s take our previous example, including the interest you have earnt over the 10 years you now have £10,100.45 in your account, but when we factor in inflation it will only buy you £8,252.80 worth of goods. Not great if you want to replace your car and you actually need £10,000.
So back to the original statement, “I don’t want to lose money” should it not be “I don’t want my money to lose it’s purchasing power”- leaving it in a bank or savings account given where we are in terms of interest and inflation rates may not be the best option.