Investments, Savings

Beat the Bank

Cash in the bank sure looks great, right? For most of us, seeing our hard-earned funds lay conspicuous as digital figures in our account is a welcome sight — safe in its electronic vault, all snug, as we add more savings to our pot and let it work hard for our future…right?

The UK stock market is up more than 15% from a year ago. The average cash savings account pays interest of 0.5%.

Given the choice between the two, where would you put your money? It’s a no-brainer, right?

This quote alone should make you question leaving all your money in a bank account. Bank’s savings rates are dismal and are not the place to make your money work for itself, end of. That’s not just me saying that — the alarmingly obvious data is available to anyone.

That said, it’s easy to want to leave your money stashed in a bank account, thinking that your savings are doing “well” because you have amassed a hefty amount. When in reality, this isn’t the most effective option.

Inflation Is A Killer

If you saved your cash at 0.5% per year yet inflation was 2%, what is happening to your money? If you understand inflation, you will know that the real value of those savings is diminished; understanding this is an easy way to see that whilst your money is growing in a bank, its value may not be.

Have a look at the figure below: 

Now, if you stashed away your savings in a bank, with their low-interest rates and for the same time — how useful would those funds be for, say, your retirement? Not very useful at all, would it?

This is why it is imperative to understand our savings profit after inflation. For example, your account pays you 2% interest per year which means you have more money after a year — great! However, if the inflation rate is higher than the interest, that money can purchase/achieve less than the amount you began with…ouch.

If your goal is to make money on your investment, you need to find an account or investment that ‘beats inflation’ – i.e. the interest or profit you make is higher than the inflation rate.

Have a look at the average bank savings rates and then the rate of inflation where you are — you may be in for a surprise!

Deposit Insurance 

If my money is in a bank, it’s completely safe, right?

In a nutshell, deposit insurance protects customers funds in the event of a failed financial firm, such as your standard bank accounts. These are common across many countries to enhance financial security and provide a safety net for financial stability. 

What this means for you is preventing loss of your funds if your bank fails…but by all means not all of it. Some of your savings are preserved up to the threshold, which differs by country – for example:

Money above this figure is not guaranteed, simply meaning that any savings above the limit are at risk of complete loss if the financial institution fails. It is worth checking what the bank insurance limit is in your country so that you can plan accordingly. 

For example, some countries may offer this limit per account, so that you can spread out any wealth above this figure between different institutions…however, if you’re stashing large amounts of money away at these limits, whilst obtaining meagre savings rates and not actually needing the funds, is it not better put to use elsewhere? 

Tie this in with inflation. In the UK, for example, the insurance limit is £85,000. Ask yourself if you really need all of that sitting in your bank, where it is earning low savings rates and at the risk of inflation as mentioned above. Chances are for your Average Joe, you don’t! And leaving it sitting there is doing nothing for you. 

Beat the Bank 

If you’re sitting on funds that you don’t essentially need, leaving them to “rot” in a bank, it’s time to make your money work for you. If you have your Emergency Fund sorted out, alongside any savings you need for short-term goals subsidised, it’s time to consider investing your excess savings in order to beat the low interest that your bank provides and inflation. 

Remember that this year, the stock market is up 15% whereas the average savings account has been paying 0.5%. Investing funds that you do not need right now but wish to save for your future are best invested over the medium- to long-term, targeting greater returns than offered in traditional bank accounts.

Investing should be unique to your circumstance and there are many ways to get started. You may wish to go solo, seek professional help or Robo-advisory — getting started is the key. DIY Investing is definitely an option, but make sure you give it the proper research and are able to control your emotions.

It also doesn’t need to be complicated to get going; most people’s longest-term goal is retirement savings, which can be a small, monthly contribution over many years, but best started yesterday. Regular savings and/or lump sum investing are great ways to manage your investments, which you can start with little effort. Compound interest is your best friend over the long term, so saving in your youth will maximise the potential returns for your future. 

Whatever you decide to do, get started and get your money beating the bank.

Want to beat the bank? I’m here to help!

If you have any questions or are seeking some advice, drop me an email at:

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