Choosing between savings and investments is a common issue and one that requires a bit of nuance. Not every solution suits every person, and both have their own set of pros and cons.
From appealing interest rates to which approach will serve you best, what wealth managers think, and more, this article will explore the benefits of savings and investments. The goal is to help you understand the best place for your money in the short and long term.
Why people are choosing savings
The past few years have seen a change of economic policy and with supply chains breaking down and living costs increasing, inflation has skyrocketed. As a result, the Bank of England raised their base interest rates to over 5% for the first time since 2007.
This has led to savings growing in popularity because of the interest you can earn, which is in stark contrast to the previous decade or so, where interest rates on savings accounts were negligible. The Bank of England, for example, held its base rate below 1% for 13 years after the global financial crisis of 2008.
So, holding cash in savings has become incredibly popular and has pushed lots of investors away from the stock market. But is this the right move?
The case for investing
Financial advisers, in general, aren’t convinced by the efficacy of savings in the long term. Most argue that investing in cash for its yield isn’t as effective as other assets, particularly when you factor in inflation and economic uncertainty.
To be fair, it isn’t hard to see why people are choosing savings over investments, given that 5% is hard to achieve in the stock market without choosing high-risk assets. However, this ignores the instability of the British and global economy, and assumes that interest rates will remain high for years to come which is unlikely.
Investments, however, outperform savings in the long term, even if they can be riskier in the short term. Investments also protect your cash from inflation and unpredictability, which savings accounts don’t do, historically speaking.
In addition to these factors, investments allow you to invest through pensions for extra tax relief and there are opportunities to earn an income through dividends, too.
Savings vs investments – which one wins?
If you’re saving for something in the near future and have a financial adviser who can provide accurate inflation forecasts, savings accounts may be the answer.
If you’re in it for the long game and want to protect your cash against inflation and economic/political uncertainty, investments can help you get there.
Conclusion
Savings may suit you if you have short-term financial goals, especially with interest rates set to remain high for the foreseeable future. However, investments have historically outperformed savings over the long-term and remain the most effective option, especially since interest rates won’t stay this high forever.
At Cedar House Financial, we have years of experience, and a deep understanding of the market means you’ll always receive advice that suits your financial circumstances, goals, and risk appetite.
Contact our team if you’d like to find out more about investments.