“Should I just leave my cash under the bed?”
“Is cash just dead money?”
“I can’t find a good interest rate! Should I just invest my cash in the stock market?”
These are some of the questions we get asked when we speak to our clients.
The recent headlines in the financial media have been dominated by Santander cutting interest rates on its very popular 123 account. This has prompted me to write this blog as I believe that, although it can be boring, cash can be king in your overall financial planning.
So, Santander are:
Cutting the interest rate on its 123 current account from 1.5% to 1% on balances up to £20,000 from 5 May
Capping the cashback paid to £15 a month. The account currently pays 1% on water bills, council tax and on Santander mortgage payments, 2% on gas and electricity and on Santander home insurance, and 3% on phone, broadband, mobile and TV packages. Each category will be capped at £5
Freezing the account fees, which will remain at £5 per month for 123 customers and £1 per month for the Lite Current Account. The range of household bills on which cashback can be earned will also remain the same
Scrapping their overdraft fees and introducing a single interest rate of 39.9% from 6 April.
The Santander 123 account was originally launched with an interest rate of 3% but was cut to 1.5% in 2016.
The new cut means that the account will be less attractive for cash savers, with the interest earned dropping by around £100 a year for those with the maximum balance of £20,000.
A number of banks have cut their current account rates in the past year, while savings rates have also been falling.
The drop in interest rate puts the Santander 123 account well below the top easy-access rate from Gatehouse Bank at 1.40%. It also falls short of the highest-paying current accounts.
For example, the Nationwide FlexDirect pays 5% interest on balances up to £2,500. This is an introductory 12-month offer and, when it ends, the rate drops to just 1%. Agreed overdrafts are free for the first year, but you’ll need to pay in at least £1,000 a month.
The TSB Classic Plus pays 3% interest on balances up to £1,500. You will need to pay in at least £500 a month, register for internet banking, and opt in for online bank statements and paperless correspondence.
An excellent resource for shopping for the best savings rates available for your cash is Moneyfacts. Their comparison tool is a great place to start.
Cash = Prizes
Amongst the headlines generated by banks and building societies over the last few years, one institution (and one particular product) has somewhat been largely forgotten or overlooked.
National Savings & Investment (N&SI) is the HM Treasury backed organisation that offers Premium Bonds.
Premium Bonds are a great way to save cash and have the added thrill of a potential prize win. You can invest between £25 and £50,000 and:
Your investment is 100% secure
There is a chance to win £1 million every month
All prizes are tax free
The odds for winning with each £1 invested are 24,500 to 1
The annual prize fund interest rate is 1.40%
You can apply for Premium Bonds online.
Don’t get me wrong. As well as some benefits to holding cash, there are obvious pitfalls, including:
Low interest rates, therefore low overall returns
Holding cash is not very exciting
Inflation – if inflation is outpacing the interest you earn than your future purchasing power will diminish.
However, holding cash will give you a buffer for when you enter retirement.
And, the Financial Services Compensation scheme (FSCS) will protect you up to £85,000 per person, per bank, building society or credit union. This rises to £170,000 for joint accounts.
The key point here is that this is for only for UK-authorised banks, building societies or credit unions, which brings me onto my next point…
Don’t Be (A) Fool(ed)
There are lots of unregulated, non-authorised investment schemes that promise to give you ‘better than cash returns’ for cash-like risk.
Whilst this might be true of the underlying risks that your money is invested or deposited in, these schemes and accounts do not carry any protection. The old saying of ‘if it’s too good to be true then it probably is’ stands the test of time!
So, if the institution fails then you may lose all your money. London & Capital Finance is the most recent and high-profile case, where there is a total of £230m of client money that is at risk of not getting paid back.
In total, nearly £1 billion of investors’ money was lost to collapsed unregulated/unauthorised firms in 2019.
Cash is King
In my opinion, cash is an essential part of any client’s portfolio. We must put to one side the fact that cash over the longer term is likely to lose us money (thanks to inflation). We must also park the fact that it is not exciting or hugely financially rewarding.
The main reason we should always look to hold a significant part of our assets in cash is that it will give us peace of mind and security. It also creates the right behaviours when spending our money and reviewing our long-term stock market-based investments.
Holding cash will allow you to emotionally ride out the inevitable (and needed) ups and downs you will get from investing in the stock market long-term. It will allow you to stay invested and benefit form the returns that the market gives you, as well as not potentially destroying wealth by buying and selling at the wrong times.
The Spending Window
More importantly, and at a crucial stage in our lives, holding cash will allow you to be financially free to spend your money early on in your retirement.
The truth is, once retired we all have a window of opportunity to spend our money on more luxury type experiences; adventures, creating memories – basically those things that are most important to us. In our experience this window is typically 10 to 15 years and lasts until we are 75.
By holding cash as a buffer, you can budget more effectively to ‘front load’ your spending, ensuring you can ride out short-term stock market movements. You then have long-term invested assets that can provide you with the potential for inflation beating growth and longevity of capital.
Ultimately, this allows you to plan and live an extraordinary retirement – without the fear of ever running out of money: whatever happens!