If you’ve got decades of work ahead of you, then worrying about finding the top cash savings deal is likely more effort than it’s worth.
If you are a young saver, then getting preoccupied with which savings account to stick your money in – even if it’s one paying a market-leading rate – is unlikely to be a great use of your time.
You’d be better off looking at how and where to invest the money, rather than locking it up in a savings account.
Cash vs investing
It’s not exactly a secret that if you are aiming to get a decent return on your money, you are more likely to find it by investing that money instead of sticking it in a traditional savings account.
But the actual difference in the returns you can get are genuinely shocking.
Schroders put together some research last year, looking at how £1,000 would have performed if it was put into the average Cash ISA back when the scheme was launched in 1999 and then enjoyed average returns each year thereafter.
By the 2016/17 tax year, that cash would have been worth £1,162, once inflation is taken into account. £162 in interest, over the best part of two decades.
That’s pretty awful, isn’t it?
By comparison, if that money had instead been invested in the FTSE All-share index – so essentially the entire UK stock market – that £1,000 would be worth £1,841.
This isn’t a one-off example either. If you invest your money properly, and over a decent length of time, then history suggests there’s a good chance you’ll get a better return than by opting for a cash savings account.
The highs and lows
It’s worth remembering that there will be far more highs and lows in terms of what your money is worth when you go with investing rather than cash.
As Schroders noted, the period it looked at included two of the biggest stock market crashes in history – the bursting of the dotcom bubble around the turn of the millenium and then the great financial crash.
That’s why investing needs to be seen as a long-term activity – markets ebb and flow, and for every moment of excitement over an index hitting a new record high, there will be hiccups along the way too.
As a result, if you’re going to invest, you need to keep a cool head and resist the urge to run when things start to look a bit iffy.
Another important lesson here is in the importance of diversifying.
It’s not enough to buy a handful of shares and then expect them to outperform the best cash ISAs – you need a properly balanced portfolio, across a range of industries, so that if one sector hits tricky times, the bulk of your portfolio is unaffected.
This is one reason why tracker funds have become so popular with investors, particularly those who are relative novices.
Rather than worrying about who is doing well and who is on the ropes, an index tracker invests in every firm in that index – so a FTSE 100 tracker, for example, will invest in all of the top 100 firms, in an effort to mirror the performance of the index as a whole.
You’ll never beat the performance of the index itself, but you shouldn’t finish too far off it either.
Do I still need a cash safety net?
Now, obviously there is a very big difference between putting your money in a savings account and investing it.
With a savings account, the worst that can happen is you endure a naff rate of interest and finish up with largely the same amount you started with.
Things can go rather more horribly wrong with investing, as you can lose the lot.
That’s why it’s a good idea to split your money. Have some in cash that you can call on in an emergency, which is essentially safe other than from the effects of inflation.
Just how much you should keep in cash is open to debate – some think it should be the equivalent of a couple of months’ wages, and that seems sensible to me.
If you lose your job, then you have the cash on hand to ensure that the bills are paid, for example.
Why things change for older savers
The situation is a little different for older people.
As you get closer to retirement, you tend to want to move away from having the bulk of your money in something potentially volatile, like the stock market, and more towards the relative safety and security offered by cash savings accounts.
Sure, the interest rates are unlikely to be anything that will set the pulse racing, but as you begin to prepare for life after work, it’s better to have a more concrete idea of the money you’ll have at your disposal.
What do you think? Are savings rates a bad idea for younger people? Are they even suitable for older savers given the rates on offer? Let me know what you think in the comments section below.
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