Over the last couple of months you may have noticed an email or two about the interest rate on your savings account going down.
What is going on? Since March, central banks around the world have been slashing interest rates in response to the financial disruption caused by the ongoing global pandemic.
So, how do lowered interest rates impact my savings?
When the Bank of England lowers its base rate (which it did from 0.75% to 0.25% and then 0.10% in March) it has huge implications for the economy and for your bank account. Why? First, because changing this rate influences most every other interest rate you’ll see in the market and second, because it’s the most important monetary policy tool at the bank’s disposal.
While previously a savings account may have offered you 1.5%, right now the best you’ll be able to find is somewhere around the 0.5% mark. And here’s the catch: with inflation targeted at 2% in the UK, you’ll likely lose money by keeping long term savings in cash.
So, are cash savings worth it?
First off, cash savings should always be a part of your financial plan. A good rule of thumb is to have 3-6 months saved in an emergency fund for covering basic necessities (shelter, food and utilities) when the unexpected comes up.
But, for the average person saving for the long run, cash savings make little sense beyond an emergency fund. Here’s a great example of why: £10,000 put into a savings account paying 0.9% would give you £12,522 in 25 years whereas if you invested in the FTSE 100 (the UK’s largest stock index) over the same period of time, you would have £45,000 despite market ups and downs.
What does it mean for me?
While 2020 has been a tough year, it’s important to remember that history (and vaccine progress) seem to indicate that life will go on and in the long run you’ll want your savings working for you.
The easiest way to do this? Once you’ve built an emergency fund, and killed any debt, investing your money in the markets through a globally diversified investment portfolio (like the one you may have at Wealthsimple) will help you get one step closer to securing the financial future you want.