In theory, it might seem like putting your cash in the bank is the best thing to do. After all, most banks are too big to fail – and there are laws in place to protect your deposits. But there’s no way to protect against inflation – or, indeed, the lack of choice that the big banks provide. With that in mind, this article will explain the options and point out what you need to know to make an informed decision about your savings and investment pathways.
The appeal of savings
The old joke
about people storing cash under the mattress is surprisingly still a realistic
While most people – at least in the developed world – are now what the industry terms “banked” and hence have access to bank accounts and other financial services, it’s still the case that most people are cautious. Having savings in cash means that you’re not subject to the ups and downs of an investment market such as the stock market, while it also means that you can take them out – or “liquidate” them with greater ease.
Inflation is a risk
But it’s also worth remembering that savings are not necessarily bulletproof. It’s certainly the case that savings which are stored in a bank covered by the Financial Services Compensation Scheme (or FSCS) will be protected up to a certain amount if the bank goes out of business, which does mean that in theory you can’t lose by putting your money in the bank.
But what isn’t protected is the value of that money, and that’s because of inflation. Take the following example: if you deposit £100 in a bank savings account and the inflation rate is 0% over the course of a year, you’ll find that you’ll be able to buy the same items at the same price. But if inflation is 2%, you’ll find that you’ll have to have £102 in order to purchase the same. And as the amount of savings you have scales up, you’ll quickly find that inflation eats into what you have more and more. The interest rate on bank savings is currently not keeping pace with inflation rates – so you’ll never be able to recoup those losses.
Investing also provides a range of choice. Cash savings accounts tend to be just that: your cash goes into a specified bank account, and it is invested or lent out on your behalf by the bank. With investments, you can choose in various levels of detail where this can go. Taking a look at this review eToro reveals that there are diverse choices, from stocks and shares to cryptocurrencies. By investing, you have the opportunity to learn about a certain area of the investment market and become a mini-expert who can make informed trading decisions. There’s not necessarily a right or wrong answer to the question of how to grow your wealth and keep your deposits protected, however, by keeping yourself fully informed about the level of choice on offer in the savings and investment markets, you’ll be able to decide whether you would rather save or invest for long-term growth and security.