Striking the balance between your savings pots and your investment horizons

Everyday life is getting more expensive. But what can you do about it?

As many as 1 in 3 people are holding too much cash and could be falling victim to our invisible enemy - inflation.

The thought of having too much cash probably seems like a nice problem to have, but for people in that position, the rate of inflation (6.2%) versus the best easy access savings rate (0.85%), means their hard-earned cash is actually falling in value.

Their purchasing power is declining, as prices are rising faster than their savings.

So how can we tackle inflation?

For a lot of people, inflation is a cue to check their budgets, and potentially make changes. As well as impacting the cost of household utilities and essentials, inflation can also create volatility in the stock market. So, it’s no wonder that in the current climate, people are driven to what they think may be the safest investment – cash.

But, cash comes with its own complications.

We suggest that people should aim to have 3-6 months’ worth of essential expenditure in cash, to protect themselves should they need money quickly. This increases to 1-3 years’ worth of expenses for those in retirement.

What can be done once you’ve built that buffer?

The HL Savings & Resilience Barometer exposed that as many as 1 in 3 have more than the 3-6 months’ cash buffer we suggest. And 1 in 7 are even holding on to additional cash without investing a penny.

Investing provides an opportunity to help beat inflation, offering the prospect of a better long-term return than cash interest rates. By investing even small amounts each month, you’re giving your money the chance to grow with the stock market and the longer your timescale the greater the potential returns. However there are no guarantees, and unlike cash, investments can fall as well as rise in value so investors could get back less than they put in.

It’s possible that your living costs have risen over the last 6 months, so it’s sensible to keep an eye on these costs more regularly than you’re used to. However, savers need to balance the need to hold the right amount of cash for their circumstances with the potential consequences of holding too much. There is actually risk in taking no action.

Can raising interest rates help?

One tool to control inflation is to use interest rates to try and dampen spending.

While rising interest rates can encourage people to spend less and save more, interest rates are still historically low and offer little in the way of growth for your savings.

In just five years, what would have cost £1,000 would now cost £1,184 in today’s money. Percentage-wise, you’d have needed your savings to have risen by 3.6% a year in that time, just to keep pace with inflation. Anything less than 3.6% would mean that the real value of your savings has fallen. So while the base interest rate has started to tick up, it’s still got a long way to go to help savers match inflation.

Some will be comfortable with this, in exchange for the security that the cash offers.

What can be done in the long term?

For your long term goals, investments can make your money work as hard as you do. Investing is a key component when planning for later life and forms the fifth pillar of our Five to Thrive - the final building block of financial resilience. We would always encourage people to take a minimum of a five year view.

When investing, you need to consider your own attitude to risk, and how hands on you want to be with your savings. Diversification is a way to minimise risk – it’s investment speak for don’t put all your eggs in one basket. By investing into a range of industries, geographies and investment sectors, you avoid putting all your money in one place.

An easy and convenient way to diversify is by investing in a fund. A fund is a pool of investments managed by an expert – meaning investors can spread their money across a range of assets, while limiting their costs and administration. Check out our Guide to Investing in Funds for more information.

There are over 3,000 funds on the HL platform and different funds will specialise in different sectors, as well as hold a different number of assets. If you’re looking to begin investing in a pension, ISA or a Fund and Share account, our Wealth Shortlist could be a good place to start. Our experts have selected a number of funds that meet our strict criteria. We focus on key areas which help identify funds our analysis indicates have the greatest performance potential. Investors can choose whether to invest a lump sum or on a monthly basis. Remember, investments can fall as well as rise in value, so you could get back less than you invest.

Starting to invest can seem like a big decision, but we’re here to help. Visit our website for more on the basics of investing. And if you need more then our Financial Advisers can help provide solutions.