Are You Saving? You'd Be Better Off Investing

According to the latest NS&I Savings Survey, Britons are saving more of their monthly income than at any other time over the past two years.

Despite the challenging economic environment, the proportion of income that people are setting aside has returned to levels not seen since before the start of the economic downturn.

And while such survey data can sometimes be suspect, I'm inclined to believe it for two very compelling reasons.

• First, the proportion in question -- 6.9% -- precisely matches the Bank of England's own reported savings ratio figure.
  
  
• Second, the survey has a decent sample size -- over 3,000 respondents -- and has been running every quarter since winter 2004, over which time it's proved a reliable tracker of savings trends.

In short, then, a 'silly season' statistic this isn't.

Income down, savings up

And the fact that people are saving more is genuine good news. A return to the debt-fuelled excesses of the run-up to the credit crunch is good for neither consumers, nor the economy as a whole.

Overall, the number of people who say they regularly save each month has increased to 50% of the population, marking the first time for more than two years (since the winter of 2007/08) that half of the population say they are committed to a savings habit.

On average, in short, Britons are now saving £85.21 each month, up from £81.94 last quarter -- despite their take‑home income continuing to decline, falling to £1,235.00 from £1,310.10 last quarter, suggesting that savings have become more of a priority.

Poor returns

But are they getting a good deal? The evidence very strongly suggests that they aren't.

As I wrote last December, the Office for National Statistics' ground-breaking report 'Wealth in Great Britain' has for the first time shone a spotlight in some detail on where -- and how -- savers actually save.

Ordinary savings accounts are the most popular savings medium, held by an estimated 62% of households. ISAs are also popular: 36% of households, it turns out, have a cash ISA.

Nor are the amounts involved trivial. Although 50% of households with savings accounts had £3,500 or less in their account (and 25% had £500 or less) the average amount held in households' savings accounts was £18,300 -- a fairly hefty sum. The average cash ISA balance, too, was a very creditable £6,000.

Yet interest rates are at an all-time low. What's more, as I wrote a month ago, NS&I itself has pulled the plug on one of its best products, its inflation‑linked savings certificates.

People might be saving more, but their savings are very likely to be earning them a derisory return.

Is there a better way?

Well, yes. And long-term readers of the Motley Fool won't be surprised to learn what it is. Put some cash aside in a savings account, to be sure -- because emergencies do happen -- but for long-term wealth accumulation, take advantage of the wealth-building power of the stock market.

Which makes especial good sense when -- as now -- interest rates are low, even as stock market valuations are also depressed.

Look at the figures. Let's be charitable, and assume an average interest rate of 3% over the next ten years. Let's also be realistic, and not use the 9% long-term real return on the FTSE All-Share as a benchmark, but the lower rate of 7% suggested by the latest Barclays Equity/Gilt study.

The saver doggedly parking NS&I's average of £85.21 a month in a savings ISA will accumulate £11,937 over those ten years. But the saver making use of a FTSE All-Share index-tracking ISA will accumulate £14,834, some £2,897 more. That's more like it.

Of course, we are in exceptional times. Barclays have termed the period 1998-2008 "the lost decade" because cash -- almost uniquely -- outperformed the stock market. So it's happened before, and it might happen again.