Soaring inflation could see your cash savings losing value in real terms. Here’s how investing could help - and what to you need to consider before taking the plunge.
Earning a return on your savings that beats inflation is going to get a lot tougher this year.
Since the Brexit vote in June the official rate of inflation has already climbed to a two-year high of 1.2% and is predicted by some to soar to 2.8% by the end of 2017.
This means for cash to keep its purchasing power you will eventually need to find an account to help your money grow by 2.8% or more, which is already almost impossible.
Banks and building societies have been slashing rates on easy access, fixed rate and cash ISA accounts as well as some high interest current accounts since the Bank of England cut Base Rate to 0.25% in August.
So there is a good chance that your existing savings account isn’t going to help you beat inflation - which means the money you have put away is actually losing value in real terms.
Time to invest?
To stand a better chance of achieving a real, above-inflation return you could consider riskier options like peer-to-peer lending or investing in the stock market.
Peer-to-peer websites allows investors to lend directly to borrowers in need of a loan.
Both parties get a better deal by cutting out the middle man in the shape of the banks. Zopa for example is offering returns starting from 3.1% up to 6.3%.
However, you could make even greater returns over the long term by looking to the stock market.
Research from investment firm Fidelity shows that £15,000 invested in the FTSE All Share index 20 years ago would be worth £53,430 today.
In contrast, the same amount put into a UK savings account would have generated just £19,991 over the same period.
That’s a difference of £33,439.
How to get started
If you are considering investing, here are some tips on getting started - and what you need to watch out for.
Understand the risks
The most important thing to understand is that your money is at risk and returns are never guaranteed. So you could end up with less than you put in – or even nothing at all.
Decide what risk-reward trade-off you are comfortable with when choosing what to invest in and creating a portfolio.
Check the fees
It’s important to keep an eye on the fees and charges associated with the investments you pick.
Figures from the Money Advice Service show a £10,000 investment offering returns of 5% a year with yearly operating fees of 0.5% will be worth £24,014 over 20 years compared to £20,696 for a fund charging 1.25% - a difference of over £3,000.
Most actively-managed funds charge an annual fee of 0.75%-1.25%, which might not sound like a lot but can cost thousands in the long run.
So make sure you do your research about what the charges are for and if a fund manager is worth the expense.
Tracker funds could be a cheaper option. These simply mirror the performance of a selected stock market index and fess cost tend to range between 0.25%-0.85%, according to the Money Advice Service.
There’s also robo-investing, which is essentially where a computer programme rather than a wealth manager takes care of your portfolio.
Learn more in our guide to robo-investing.
The best way to shield your investment portfolio from the ups and downs of the markets is to diversify.
This involves spreading your money across a range of different asset classes (like bonds, equity, and property), industries and regions to reduce the risk of your money being overly affected out by one event.
Commit to the long-term
Investments generally show the best returns over the long-term. So make sure you can do without the money for an extended amount of time.
Tom Stevenson director for personal investing at Fidelity International, says investors shouldn’t be put off by short-term market jitters.
“While it might be tempting to jump ship when markets get choppy, the best days in the market often follow the worst. Remember, time in the market matters much more than timing the market.”
Keep some cash
You should always keep a portion of your savings in cash so that you can access it quickly.
For the best rate for cash savings take a look at: Where to earn most interest on your cash.
There are a few high-interest current accounts that could still beat inflation should it rise to 2.8%.
For example, Nationwide's FlexDirect offers a rate of 5% on balances of up to £2,500 (fixed for the first year), while TSB's Classic Plus will pay you 3% on the first £1,500 in your account.
You don’t need a lump sum to get your portfolio off the ground and small regular investments may work out better.
By drip-feeding your money into the market, you will benefit from a process known as pound cost averaging.
Stevenson explains: “Buying at a variety of prices and spreading ongoing investments over time helps to cushion your portfolio from dips in the stock market.”
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