Are your clients relying on cash savings for their financial future? Why it might be time to rethink

Concerned senior woman looking at financial paperwork

Are your clients holding too much in cash?

Cash savings may seem like a simple and reassuring option. They’re usually easy to access and a lower-risk option when compared to investing.

What’s more, although inflation is gradually falling, interest rates are at a 15-year high, with many banks offering an interest rate of more than 4% on easy access accounts. So, cash savings might seem like an attractive option.

However, while it may be wise to keep some money to hand for short-term and unexpected costs, relying on this strategy could limit your clients’ returns and make it more difficult for them to reach their long-term goals.

Over time, inflation could diminish the real-term value of cash savings and eat away at their purchasing power. According to MoneyAge, UK savers lost £37 billion in real terms on their cash pots due to higher rates of inflation in 2023.

In comparison, adopting a long-term investment strategy could offer the potential to deliver higher returns and boost overall wealth.

Read on to find out why holding too much in cash could be damaging your clients’ wealth and discover how they could potentially improve their long-term real returns.

Over time, even a modest inflation rate could erode your client’s cash savings

Even when savings interest rates are higher than average, they’re often still lower than the rate of inflation. This means that cash funds are likely to lose value in real terms over time.

With inflation rates hitting the headlines repeatedly since they began to rise in 2021, some of your clients may feel anxious about how this could affect their finances. Indeed, although inflation has begun to fall, it remains “sticky” at 3.2% as of April 2024 – considerably higher than the government’s target of 2%.

What’s more, while higher rates of inflation often cause the greatest concern, over time, inflation is likely to damage the real-terms value of cash savings even if it remains at modest levels.

Data published by Schroders demonstrates the problem. As you can see from the table below, if your client had £10,000, and the rate of inflation increased by just 2% each year, the purchasing power of their savings would fall to £6,095 over 25 years.

In this way, both time and inflation can erode cash savings.

So, even with inflation rates falling, holding large amounts of cash may not be the best strategy for achieving long-term goals, such as funding retirement or paying for a child’s education.

By investing their wealth, your client could potentially achieve higher long-term returns

If your clients are concerned about their long-term financial security, investing some of their wealth in the market could give it the best chance of keeping pace with, or even beating, inflation.

While cash savings may feel “safer”, especially to your more risk-averse clients, adopting a long-term view could help them feel more confident about investing.

This data produced by Schroders illustrates the relative likelihood of cash savings and investments beating inflation over a period of 20 years.

As you can see, between 1926 and 2022, equities offered higher inflation-beating potential than cash across all time frames, with the chances of equities beating inflation reaching 100% over a period of 20 years.

While past performance is no guarantee of future performance, the above illustrates the potential return from investing long-term. However, to benefit from higher returns, your client might need to take on more risk.

So, if they’re new to investing and feel apprehensive, a financial planner can create a bespoke plan that aligns their appetite for risk with their long-term goals.

Equally, if your client has an established investment portfolio, a financial professional can advise on how they could diversify their portfolio to balance risk.

Read more: How one powerful chart shows the importance of diversification

Combining cash savings and investments could help your client achieve their short- and long-term goals

Cash savings and investing may both have a valuable place in your client’s financial plan. The key is to ensure that the financial strategies they adopt align with their short-, medium-, and long-term goals.

Saving cash could be a sensible strategy for achieving short-term goals, such as funding a holiday or buying a new car. Likewise, it may be reassuring to keep a contingency fund for emergencies. Indeed, experts recommend having around three to six months’ worth of expenses put by.

However, if your client has long-term goals that reach far into the future, such as saving for retirement, they might want to consider investing.

We can help your client create a balanced portfolio that includes cash savings and investments. Indeed, working with a professional may give them the confidence to break away from an over-reliance on cash savings.

If you have clients who would like to find out how we can help them create a balanced portfolio that combines cash savings and investments, please get in touch.

We’re a Chartered practice with wide experience in helping clients meet their long-term goals.

Email or call 01454 416653.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

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.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.


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