The danger of holding too much cash

Posted on

How much of your wealth do you hold in cash? Whilst it’s often viewed as the ‘safe’ option, there is a danger of your assets losing value in the long term and holding too much in cash too.

It’s easy to see why people choose to hold large sums in cash. As it’s something we handle every day, whether physically or digitally, it can seem more tangible than other assets. The Financial Services Compensation Scheme (FSCS) also protects up to £85,000 should a bank or building society fail per individual. The combination of these factors may mean you view cash as the most appropriate way to hold wealth.

However, cash does lose value and this is particularly true in the current low-interest climate.

Interest rates have been at a historic low for more than a decade following the 2008 financial crisis. The Bank of England has recently cut rates even further. In March, as it became apparent Covid-19 would have an economic impact, the central bank slashed the base interest rate to just 0.1%, the lowest level on record.

Whilst potentially good news for borrowers, the rate cut isn’t positive for savers. It means your savings likely aren’t going to deliver the returns they once were, especially if you compare the current rates to the pre-2008 ones. Before the financial crisis, you could expect to enjoy interest rates of around 5%.

At first glance, lower interest rates can seem frustrating but don’t mean there’s any need to change how you hold assets. After all, your money is secure and whilst it might not be growing very fast, it’s not going down, right? This is true if you’re just looking at the amount that’s in your account. However, in real terms, the value of your savings will be falling.

Inflation: Affecting the value of savings

The reason the value of cash savings falls in real terms is inflation. Each year the cost of living rises and if interest rates fail to keep pace with this, your savings are gradually able to purchase less and less.

The Consumer Price Inflation (CPI), one of the measures for calculating inflation, for April 2020 suggests the inflation rate was 0.9%. This figure was down on long-term averages due to coronavirus restrictions, however, it’s still higher than the base interest rate. As a result, the spending power of cash savings will have fallen.

Year-to-year, the impact of inflation can seem relatively small. Yet, when you look at the impact over a longer period, it highlights the danger of holding too much in cash.

Let’s say you placed £30,000 in a savings account in 2000. Following almost two decades of average inflation of 2.8% a year, your savings in 2019 would need to be £50,876.75 to boast the same spending power. With low-interest rates for more than half of this period, it’s unlikely a typical savings account would help you bridge this gap.

When is cash right?

Whilst inflation does affect the spending power of cash savings, there are times when it’s appropriate.

If you need ready access to savings cash accounts are often suitable, for example, if you have an emergency fund. When you’re saving for short-term goals (those less than five years), a savings account should also be considered. Over short saving periods, inflation won’t have as much of an impact and can preserve your wealth for when you need it.

However, when setting money aside for long-term goals, investing may be a better option that’s worth considering.

Investing: When should it be considered?

Investing savings means you have an opportunity to beat the pace of inflation with returns, therefore, preserving or growing your spending power.

However, investment returns can’t be guaranteed and short-term volatility can reduce values. For this reason, investing as an alternative to cash should only be considered if your goals are more than five years away. This provides an opportunity for investments to recover from potential dips in the market.

If you’d like to talk to one of our financial planners about the balance of your assets, please contact us. Our goal is to align aspirations with financial decisions, helping you to strike the right balance.

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.

We aim to keep our clients up to date on interesting and relevant financial news.

You can sign-up to receive our monthly newsletter by email, even if you’re not yet a client. Sign-up using the form below.

Client testimonials

I have always found Black Swan to be caring and understanding of my quirky lifestyle. I always feel they try to get me the best returns while respecting my current needs.

Sally Muir

A client since 2011

We would be very happy to recommend the support and service we receive.

Valerie Locks

A client since 2010

I have always been completely useless regarding finance - thankfully our financial adviser is not! I've retired with far more than I ever expected and investments continue to grow safely. So - thank you!

Bernadette Jane Warner

A client since 2000

Very happy with the professional service I have received and feel a lot happier now with my finances put in order.

Martin Field

A client since 2011

Julie Cooper was recommended to me by a work colleague. She has been very helpful, professional and has explained everything well. I would definitely recommend her services to anyone else who are interested in a financial review.

Steven Rooke

A client since 2018

…Service has been first class.

Hugh Fells

A client since 2012

My face to face meetings with Rob Young and Jessica Lyons have always been very open and understandable. My questions have been answered clearly and I have left feeling that my financial matters are in good hands.

Sandra Jack

A client since 2000

[A] safe pair of hands in a complex financial world.

Gary Middlehurst

A client since 2003

A reliable company with good communication skills and good knowledge of the financial markets.

Alan Evetts

A client since 2014

Maureen Pembridge is a long-time trusted advisor to our family. The market might fluctuate but her attention to detail is consistent.

Linda Burnard

A client since 2000

I am pleased to recommend Julie as a trustworthy financial advisor. She explains financial jargon in plain language, and always listens carefully to my particular financial needs and has helped me make the best of my savings.

Carolann Samuels

A client since 2010

I have always been satisfied with the way that Black Swan has handled my account. And I have always found the staff very helpful whenever I need to call the office.

Robert Anthony Matthews

A client since 2012

An excellent personal service from a person I know and trust.

Michael Dalton

A client since 2010

I am getting a very good services from Black Swan, they have got my investments sorted out which was in a bit of a mess.

Roy Jakens

A client since 2012

A good, efficient team providing clear ideas to shape a winning strategy.

Adrian Michael Levenstein

A client since 2011

Black Swan is a company to be trusted, with friendly staff and professional advisors.

David Brian Jennings

A client since 2017

I have been with Black Swan for many years. I have never wished to change anything. They give a good straight forward service.

Martin Barrett Brooks

A client since 2010

Andy Peters has been invaluable in firstly combining several pension pots and then giving excellent investment advice. It has given us a great deal of comfort to know that our financial affairs are in such good hands.

James Guillum Scott

A client since 2014

I find my financial advisor easy to talk to and feel that she understands my lifestyle. She is always available for help when I need her and explains in words that I can understand.

Margaret Ena Glasgow

A client since 2000

Andy is a first rate Director, excellent communicator and leader.

Ross Perry

A client since

Black Swan Financial Planning and Andrew in particular, are very clever at working out how risk averse we are, and coming up with solutions that we feel comfortable with. We are happy in the knowledge that we can continue to enjoy a comfortable retirement. Andrew Peters is a very, very friendly person who is great to chat to and easy to deal with. He explains things very clearly in layman’s terms, and if we still don’t understand, he explains it until we do!

Alan & Jane Dyer

Clients since 2012

We have always found Rob [Young] to be very approachable and knowledgeable. We have every confidence in the advice given and feel comfortable with the decisions we’ve made. There are certain opportunities that we wouldn’t have known about if Rob hadn’t brought them to light, which makes the advice good value for money as far as we’re concerned.

Peter & Pauline O’Halloran

Clients since 2013

Rob [Young] is extremely knowledgeable. I knew nothing about the different types of trusts which will not only secure my income in retirement, but also leave a legacy for my children. I’m glad that I sought his advice when I did.

Sarah Wilson

A client since 2015

I am extremely happy with the service afforded to me by the company and my adviser Julie Cooper.

Geoff Coxell

A client since 2010

My wife and myself have been dealing with Black Swan for a number of years. We have met with different representatives from the company over the years and have found all very helpful in their own way. We met with James [Anderson] a few years ago and found him very helpful and knowledgeable. He keeps in contact with us on a regular basis. We find the Company information very helpful and we feel very secure with our finances.

Andrew Kirchen

A client since 2015

I have always found my adviser to be easy to contact, very professional in his approach, yet friendly and understanding. I have a sense of an experienced company behind him, really on the ball financially and with good standards.

B McBean

A client since 2011

Partner with the most reliable and experienced team of advisers

Enter your details & we'll be in touch to discuss your needs.
Alternatively, contact us directly and speak to a member of the team.





    Subscribe to our newsletter