Cash savings rates in the UK are rising after a tough few years for savers.
The Times recently reported that the average rate on a UK easy access savings account in June 2023 was 2.27%. This was up from just 0.19% back in November 2021.
According to Moneyfactscompare, as of 1 August 2023, the best available rate is currently 4.63%.
But with inflation still high, what do rising rates – and the wider economy – mean for your investments? And where should you be focusing your wealth?
Keep reading to find out.
Inflation remains high so consider the level of risk you are willing to take
The Bank of England (BoE) has a UK inflation target of 2%. And yet, in October 2022, the Consumer Prices Index (CPI) rose significantly higher, hitting a 41-year peak of 11.1%.
Since then, the CPI has been coming down. The latest figures from the Office for National Statistics (ONS) confirm that inflation for the 12 months to June 2023 was 7.9%.
While this drop might not be as sharp as the BoE had been expecting, they do still forecast a fall back to their 2% target by the end of 2024.
The important thing to note here, though, is that 7.9% is significantly higher than the best easy access savings account rate currently available (4.63% according to Moneyfactscompare and as of 1 August 2023).
Despite rising interest rates, high inflation still means that the money you hold in cash savings is losing value in real terms.
While investing carries risk, you could find that the biggest risk to your future wealth is not taking sufficient risk now.
The opportunity cost of missed investment returns could set your goals back
Not only do your cash savings lose real-terms value in a high-inflation climate, but you’ll suffer opportunity costs too.
These can be defined as the potential benefits – in this case, investment returns – that you miss out on when choosing one option over another.
Taking the time to think about your long-term goals, your risk profile, and your capacity for loss can help you to plot the optimal path. If your goal is a dream retirement, you could find that the sooner you start investing the better.
Markets fluctuate daily, but even a glance at the FTSE All-Share Index over the last 40 years clearly shows the general upward trend of the markets.
Source: London Stock Exchange
Despite dips around the second Iraq War in 2003, the 2008 global financial crisis, and the outbreak of the Covid pandemic in 2020, the potential benefits of a long-term investment are clear.
Investing – and investing early – allows time for you to benefit from this upward trend, while also helping to ride out short-term market blips. Investment returns and the snowballing effect of compound interest can help to ensure you meet your goals within your timescales.
Compared to investing, keeping your money in cash is relatively risk-free but it could see your real-terms value of your funds diminish. Investing, on the other hand, can offer the possibility of inflation-beating returns.
Don’t try to time your investments as you’ll miss out during market rises and could end up buying back at a higher cost
You’ll have heard before that “it’s time in the market, not timing the market” that counts when it comes to your investments.
This means avoiding knee-jerk reactions and ignoring the external noise, whatever form this takes. So-called “noise” might include:
- Short-term economic dips, which are part of normal market movements and to be expected
- Global events, like Russia’s invasion of Ukraine or the coronavirus pandemic
- Rises to UK inflation, the BoE’s base rate, or your bank’s savings rates.
Remember that your financial plan is aligned with your long-term goals. So, if your goals haven’t changed then your plans don’t need to either. Knee-jerk reactions or emotional decision-making can have huge consequences throughout the length of an investment.
Taking your money out of an investment when markets drop, for instance, means you won’t be able to take advantage of rising prices when markets inevitably recover. You’ll also have to buy back your investments when markets are rising, ultimately costing you more.
Consider too that current interest rate rises are a short-term proposition. They’ve come off the back of a 41-year high for CPI and 14 consecutive rises to the BoE base rate. As inflation drops though, likely, your bank’s interest rates will too.
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This blog is for general information only and does not constitute advice. It should not be seen as a substitute for financial advice as everyone’s situation is different. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.