Why keeping too much money in cash could damage your progress towards your financial goals

woman using laptop and calculator

If you’ve been worried about the rising cost of living in the past few weeks, you aren’t alone. According to data from the Office for National Statistics (ONS), more than three-quarters of Brits are worried by how much inflation is affecting their day-to-day finances.

When you’re anxious about money, it can be tempting to keep a large amount of it in cash as a rainy day fund. But while this can give you a greater sense of security, it could actually be slowing your progress towards your financial goals.

With that in mind, read on to find out why keeping too much of your money in cash can be a problem, and how working with a planner can help you.

Many households are worried by the rising cost of living

Over the past few months, there has been a spike in the rate of inflation, as everything from loaves of bread to litres of petrol have risen in price. According to data from the ONS, the Consumer Price Index (CPI) increased by 10.1% in the year to July 2022.

Global factors, such as the war in Ukraine and the lingering disruption of the coronavirus pandemic, have pushed up the cost of a variety of different goods and services. As a result, many households have had to tighten their belts.

During difficult periods, it can often give you comfort to know that you have an emergency fund to fall back on. After all, having this easily accessible cash can prevent you from having to rely on expensive credit, but it’s also important to be aware of how this choice can affect your finances.

Interest rates are typically far lower than the rate of inflation

To combat rising inflation, the Bank of England (BoE) have raised the base rate several times in the past few months. In early August, they increased it by a historic 0.5 percentage points, up to 1.75%.

Since the base rate influences the amount of interest offered by banks and building societies, this is good news for savers as it means your cash is working harder for you. However, even with this change it may still be growing too slowly.

According to market data from Moneyfacts, as of 16 August the highest interest rate offered for an easy access savings account was only 1.67%. As you can see, this is significantly below the rate of inflation, meaning that over time, your cash is losing value in real terms.

Inflation can erode the real value of your money over time

Essentially, inflation is a measure of the rising cost of goods and services over time. A small amount can often be a beneficial thing, as it helps to keep the wheels of the economy turning.

When something will be more expensive tomorrow, it encourages you to go out and buy it today. That’s why the BoE has an annual inflation target of 2%.

Of course, as you’ll have seen over the past few months, high levels of inflation can pose an issue for households. When prices rise too rapidly, people may struggle to get by and so have to tighten their belts.

The real problem arises when your wealth doesn’t keep up with the rate of inflation, as your money is losing value in real terms. Even when inflation is relatively low, over the course of several years it can have a significant impact.

If you want to see how much it could affect your savings over time, the BoE’s inflation calculator can be a useful tool.

For example, £1,000 worth of goods and services in 2001 would have cost £1,516 in 2021 thanks to two decades with an average inflation rate of 2.1%.

Working with a planner can help you to reach your long-term goals

If you want to reach your financial goals and protect your wealth from the impact of high inflation, it can be very useful to seek professional financial advice. Working with a planner can help you to make properly informed decisions and manage your wealth more effectively.

For a start, we can offer advice on how much you should keep in your emergency fund. This can help to give you a feeling of confidence and security, while also ensuring that you don’t expose your wealth to the effects of inflation unnecessarily.

Typically, most experts recommend that you keep between three and six months’ worth of expenses in your emergency fund, but the amount may vary depending on your personal circumstances. For example, if you are self-employed, we may recommend that you need to keep a larger amount in reserve.

Furthermore, seeking professional advice can also help you to make better decisions when investing, so you can give your wealth more chance to keep pace with the rate of inflation. At the same time, they can also help to ensure that you aren’t exposing your portfolio to more risk than you need to.

Working with a financial planner can help you to take greater control of your money, giving you confidence that inflation won’t slow your progress towards your long-term goals.

Get in touch

If you want to protect your wealth from the corrosive effects of inflation, we can help. Email or call 01454 416653.

Please note:

The value of your investment 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.

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