Cash in the bank is generally considered to be ‘risk free’. And for amounts below £85,000 in a single U.K. account (or multiple accounts owned by the same parent bank), we agree with the notion that cash carries very little investment risk.
However, aside from the fact that balances over £85,000 are not covered by deposit insurance in the U.K. (unless split across multiple bank accounts), such that if a bank fails (a very real risk) you lose amounts over the insured balance, there are a number of other reasons why you should consider investing your savings, rather than storing your savings in a bank
Consider how much cash you realistically need to be immediately available on demand. Very few large expenditures are required to be made with immediate notice, and for such expenses you could instead resort to using a credit card to cover the expense before paying back in full later in the month. Assuming you’re working, and your monthly income covers your rent or mortgage and your regular monthly expenses, you probably only need £1k-£2k to be immediately available in your current or savings account. Amounts in excess of that could be invested, in an investment account separate from your bank account.
There is a caveat to this, however. Investing is a long term exercise, so if you’re planning on making a big expense in the next year or so, say a deposit on a home, a wedding or an expensive trip abroad, then to make sure the amount you need is available when you need it, you may be better off keeping it as cash.
If you don’t anticipate a big expense in the next few years, or you’re not saving for anything in particular and instead saving to build wealth, then you should have most of your savings invested. With cash interest rates at less than 1%, and inflation at higher than that, your real rate of interest is negative. That means the value of your savings is actually falling through time. Investing your money can earn you a positive real rate of return, if left invested for a sufficiently long period of time.
Generally, selling your investments and withdrawing the cash from your investment account back to your current account will take 3-5 working days – that’s not a long time in the grand scheme of things, in most situations.
So, consider whether you really need to keep as much cash as you have on hand in the bank, and consider investing your savings as a way of making it work harder for you and as a way of building wealth.
We refer to lots of linked posts in this post. We hope that by following the links you can answer any questions you might have, but if anything is unclear in this post, or you have any questions relating to anything investment-related, please submit comments or questions in the section below and we’ll do our best to answer them.
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