Cash savings are an integral part of any comprehensive financial plan and are important in securing your lifestyle and livelihood. Although cash in the bank is unlikely to benefit from as much growth as other investments, everyone should aim to keep a small percentage of their income to hand in case of emergencies.
We can help you work out how much you would need to cover basic expenses such as your rent or mortgage, bills and food for 3 to 6 months. We recommend aiming for at least that amount in cash which will also help cover unexpected costs such as needing a new boiler or repairs to your car.
Despite this guideline amount being ideal, poor interest rates currently offered on cash savings mean that holding large sums in cash is inadvisable. The value of your savings will be eroded by inflation over time if the rate of interest received on your savings is less than inflation. If you keep your money in a savings account, your money will only grow by the small amount added by interest.
Conversely, this erosion of cash may be countered by the benefits of compound interest.
Compounding means that, while you earn interest on your savings, over time you earn interest on that interest. For example: if you save £10,000 at 5% annual interest, after one year you will have £10,500 – your original £10,000, plus the £500 interest you earned at 5%. But in the second year, your 5% interest is calculated on your new balance of £10,500 – so you are earning interest on your interest.
After ten years, the power of compounding will have grown your original £10,000 to £16,289. And after 20 years, your £10,000 will be worth £26,533.
How much you should keep in savings and how you can benefit from making the money work harder for you will depend on your lifestyle and goals. At Aspect8, our advisers are experienced in crafting tailored financial plans and will be able to recommend suitable figures for you to hold in savings and maybe invest elsewhere. Many clients will look to invest their money to generate greater returns, in which case, your adviser will be able to guide you through the variety of investment options available to you.
Aspect8 is a multi-award winning Chartered Financial Planning firm, the gold standard in financial advice. We’ve been helping people like you to achieve their goals since 1993. Our style is honest and plain-spoken; because that way we all know where we stand. And we focus on results; because that is how we expect to be judged. To help you make the right financial choices at every stage of your life we’ve built a team of expert advisers with specialist knowledge and complementary expertise, to guide you wherever you are on your journey.
The guidance and/or advice contained within this website are subject to the UK regulatory regime, and are therefore targeted at consumers based in the UK. Aspect8 Ltd is a chartered member of Best Practice IFA Group Ltd which is authorised and regulated by the Financial Conduct Authority.