Learn About Investing
Whether it’s banknotes or in a bank account, cash is an important part of any investment mix.
It is generally recommended to build a cash reserve for ‘rainy days’ – big enough to cover three months of outgoings or more. This is to handle life’s little, or big, financial emergencies.
Current accounts tend to be used for day-to-day expenditures, while spare cash is usually squirreled away in savings accounts or Cash ISAs.
Savings accounts usually offer better rates of interest than current accounts (most of which offer little or nothing in the way of interest). However, in return for higher interest, savings accounts and Cash ISAs may feature restrictions – such as limits on deposits or withdrawals.
It’s easy to access – instant access accounts should mean just that! To achieve higher interest rates, other accounts may require a notice period (like 60 days) or require your money to be locked in over a fixed term (like 1, 3 or 5 years). It may still be possible to withdraw your money at short notice, if you need it for an emergency, but this is likely to involve a penalty.
It’s safe and predictable – savings are protected by a government-backed scheme to the tune of £85,000. All you have to do is check out the interest rates being offered.
Cash may be the least risky option, but in the past it has produced lower returns than investing in bonds or shares over the long term.
In recent years interest rates have been lower than the rate of inflation. This means most cash savings (and Cash ISAs) are losing money in real terms.
What it means for you
The upshot is that cash may be the most sensible option if you're investing over a period of less than three years. This is because the other types of asset are more volatile.
Those investing long term tend to keep a smaller portion of their money in cash. Pension schemes, for example, would be unlikely to generate the long-term investment growth required to fund your retirement if they just stuck with cash.
Real cash savings rates
Source: Bank of England (CFMHSCV/CFMHSCW)