ACCORDING to the Bank of England (BoE), inflation and the cost-of-living crisis in the UK may have peaked after Liz Truss announced a new energy policy that would cap the cost of household gas and electricity nationwide.
So, rather than peaking at 18.6% in January, the BoE now believes that inflation won’t push past the 13% mark initially forecast for October.
However, inflation will continue to outstrip earnings growth for the foreseeable future, while the cost of food and fuel remains disproportionately high.
Credit card borrowing also increased at the fastest annual rate since 2005 in July, with the annual growth rate for this type of consumer credit rising to 6.9% at this time.
Because of this, households are finding it increasingly difficult to manage their finances and make the most of their income. But do savings accounts or investments offer the best returns in the current climate? Let’s get into it!
The Fundamental Problem with Savings
The BoE has initiated five separate base interest rate hikes since December 2021, increasing it from 0.10% to 1.75%.
This was done as a way of countering rampant inflation, with these two macroeconomic conditions demonstrating an inverse relationship.
In addition to helping quell inflation (albeit marginally) by discouraging spending, hiking the base rate also compels banks and building societies to create accounts at much higher rates of interest.
This should make savings more appealing than in recent terms, as account holders can benefit from an increased yield over time.
However, the prevailing economic trend has seen general inflation gradually erase the purchasing power of money kept in traditional savings accounts, with this evident since the turn of the century.
For example, a standard, 250g bag of tea bags would have cost you £1.50 back in February 2000.
In the 20 years or so that have elapsed since, the average price of this item has increased to £1.95, with this outstripping the performance of the typical savings account.
More specifically, if you put the same amount of cash in a savings account around February 2000, annualised interest rates in the intervening period would mean that this haul would now be worth just £1.60.
This highlights the way in which inflation (which the BoE always looks to cap at a rate of 2%) continues to outperform savings rates, even at a time when the cost-of-living remains relatively stable in the UK.
Is Investment a Better Option?
Of course, the benefit of savings accounts is that they’re virtually risk free from the perspective of loss, while you can leverage a finite return and rate of interest that will only fluctuate marginally over time.
In this respect, savings accounts are often preferred by people with relatively small cash holdings and a complete aversion to risk, as they often cannot afford to incur losses or are simply loath to risk their hard-earned cash.
But what if you have a little more disposable income or want to see some increased returns on your capital?
In this case, you could consider entering the investment market, which includes a broad range of asset classes and financial instruments that can be combined within a diverse and fruitful portfolio.
Before you invest, however, you’ll need to consider a few important factors, in order for you to come to an informed decision. These include:
● #1. What are Your Current Financial Circumstances: Let’s start with the basics; as it’s important to budget and determine precisely how much disposable income you have to invest.
Similarly, you should consider your existing debt burden and how this is being repaid, along with whether or not you have access to a cash emergency fund. This way, you can prioritise your spending and determine the exact amount you’re able to invest each month.
● #2. What Are Your Goals: Most investment plans and portfolios are designed to be cumulative in nature, which means that many will only appreciate fully over a period of five or 10 years or more. So, investment isn’t necessarily ideal if you have short-term fiscal goals or expenses, especially as speculative investment vehicles like forex are inherently complex and risky for beginners. If you want to save for your future or focus solely on the accumulation of wealth over time, however, traditional investments could well be for you.
● #3. Do You Have an Appetite for Risk?: If the answer to this question is ‘no’, you should probably avoid investing as a general rule. After all, while some investments incur higher risks and more significant losses than others, all vehicles can cause you to lose money over time. So, it’s important to gauge your appetite for risk and build a suitable portfolio, both in terms of your desired investment level (how much you’re willing to lose) and the potential returns that are in-play.
The Last Word – Our Investment Tips
As we can see, investment portfolios are capable of delivering a much higher yield than savings, but they also incur more significant risk and have the potential to drive losses over time.
So, your appetite for risk and starting capital are all key elements when choosing between investing and saving, while it’s also important to note that knowledge of your target markets is also crucial if you’re to optimise your chances of success.
If you’re still unsure about whether investment or market trading is right for you, consider taking this trading quiz.
This should enable you to determine your current level of knowledge and aptitude, making your next course of action more apparent.
If you do decide that investment is right for you, it’s crucial that you understand the risk-reward ratio associated with each asset.
This will also aid the critical process of diversification, which ensures that you minimise your real-time exposure to risk and drive sustained returns over time.
We’d also recommend starting small and building your investment portfolio in line with your growing experience and profitability.
This way, you can protect your starting capital and minimise initial losses, which is particularly important if you only intend to invest a relatively small amount each month.
Article written by Sarah Sidney
