Do you know the difference between saving and investing?
One means you are probably losing money, the other means you could be gaining.
The fact is that today, our traditional ways of saving are just like taking a match and holding it under a £20 note.
Here’s a shocking fact to prove it: for a hundred years, from 1908 to 2008, the average UK bank interest rate on savings was 5 per cent. Then it slumped: from 2008 to 2018 it was a meagre 0.6 per cent, which with inflation was a negative figure - minus-1.70 per cent.
Or put another way, our savings are now losing value. That’s what I mean when I say that, for the past 12 years, savers have been setting your £50 or £20 notes alight.
Our point this week is that to preserve or increase the value of your money, you must stop saving, and start investing. Here’s the difference between the two.
The principle of saving is that if your money isn’t at least keeping up with inflation, then you’re losing - losing spending power.
The current inflation rate is 1.5 per cent. It is expected to rise to 1.6 per cent in a year’s time, and rise further to 1.9 per cent in 2022 (according to Trading Economics).
They call inflation ‘the silent bank robber’ – it gradually gnaws away at the value of your money.
Here’s how inflation works. Back in 1974 a first class stamp cost 7p, a pint of beer 18p, a loaf of bread 10p. Today they cost 60p, £3 and £1 respectively; put another way, your 10p now gets you less than two slices of bread. You’re a few sandwiches short of a picnic, if you think your money is safe, just because it’s in the bank.
That’s inflation, and that’s what your savings have to keep up with. They won’t.
The Bank of England base rate, which largely dictates what banks offer in interest, is at a rock bottom 0.1 per cent, which means this month’s savings rates are flat on their bellies too. Let’s take a look.
The best savings rates on offer for Easy Access accounts this week are 1.16 per cent for NS&I, but only if you have £500 to save. If you have less, the online bank Marcus is offering an account you can open with just £1, but which offers a paltry 1.05 per cent.
As ever, you get a better deal if you lock your money away for a while, but it still won’t knock your socks off.
For Zenith Bank’s one-year fixed savings account, if you have a minimum of £1,000 you can get an underwhelming 1.43 per cent.
If you lock away for two years, a minimum £1,000 will get you just 1.6 per cent at FCMB Bank, and even if you lock in for five years, the best is RCI Bank’s yawn-inducing 1.8 per cent. And those are the best of them!
But not one of these will come close to the 1.9 per cent inflation we’re expecting in two years’ time.
The key to preserving the value of your money and achieving growth is to invest. A financial adviser can invest your savings in a way that suits you, and taking into account your preferred level of risk. If you have a smaller amount, for instance, you may want it invested in such a way that it’s at hand, if you need it.
Investment works by not having all your eggs in one basket. You aim for diversification across a number of asset classes, such as equities (stocks), bonds, property, and commodities. Your adviser will do this for you.
You’re not necessarily putting aside any more money, you’re just working smarter.
When you think about investing, we consider your individual financial circumstances, how you’re going to diversify across different asset classes, and the ‘financial season’ or state the economy is in.
You will also want to consider your age, your aims, and where you stand on your financial ‘life cycle’. If you’re saving long-term, perhaps for your retirement, then your perspective will be different.
Just one example: if you’re a millennial, born in the 80s or 90s, then you have plenty of time to save long-term. In that case, stock markets may offer good returns, since you have the time to ride out the inevitable market blips that occur.
Is it time to consider shifting from ‘saving’ to ‘investing’, to preserve and grow your money in the longer term?
Put those matches and that £20 back in your pocket, before you burn yourself!
:: Michael Kennedy and Shaun Doherty are independent financial advisers and pensions specialists, and can be contacted on 028 71886005. Further information on Facebook at “Kennedy Independent Financial Advice Ltd” or at www.mkennedyfinancial.com
