The Motley Fool

How inflation has eaten away at the value of cash

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Dictionary definition of inflation
Image source: Getty Images.

Ah, the dawn of the twenty-first century, with its high-tech inspired optimism for world peace, pessimism (remember the Y2K bug?) and, naturally, an old man with an unfeasibly large beard on the shiny new £10.
In 2000, Charles Darwin was already a century and a half behind the radical fringe of science, which makes you wonder why the Bank of England chose the Victorian naturalist to adorn its first fresh £10 note design of the century.
On the other hand, Darwin’s theory of evolution was so seismic it probably qualifies him as a radical for the ages.
Either way, the tenner sporting his hirsute face was the latest evolution in paper money back then. Anti-forgery features such as tiny letters and holographic imagery put it on the cutting-edge of currency.

Down with Darwin

Alas, it is survival of the fittest in the world of bank notes. To keep ahead of the counterfeiters, the paper Darwin note has now been superseded by the Jane Austen polymer version.
But you could say the £10 note has been losing its worth for years. And the culprit, of course, is inflation.
Analysts at the fund house M&G calculate a £10 note stuffed under a mattress since 2000 would be worth just £6.17 in today’s money.
That means Darwin’s £10 has lost 40% of its spending power in just 18 years!
What if you’d taken it to the bank instead of sleeping on it, and earned interest? Well, M&G reckons it would now be worth £7.27 in real terms.
That seems low to me, but M&G cites a measure called the UK Savings 2500+ Index, which is widely quoted and purports to track the interest earned on the typical High Street savings account.
As we all know, most savings accounts have paid roughly zip in the decade since the financial crisis, although I suppose canny savers could have done better by chasing Best Buy rates.
Either way, the message is clear. Inflation rapidly eroded the value of a £10 note, and you had to take some sort of action to preserve your wealth.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Ahead with equities and property

Of course, we Fools think the action you should have taken over the past 18 years with cash was to invest a chunky portion of it into ‘real’ assets, such as shares.
And over the long term, you should be rewarded for taking some short-term risk with your money by looking beyond cash savings accounts.
The following table of the past 18 years of returns makes this plain: 

Asset class

Nominal value

Real value

Cash in piggy bank



Cash savings account



FTSE All-Share index



UK Government bonds



UK Residential property



UK Commercial property



The table assumes in every case except for piggy banks and residential property that income was reinvested. Fair enough in the case of a piggy bank, but not really an apples-to-apples comparison with houses, given that a landlord would have also enjoyed rental payments (or a home owner enjoyed living in his or her house). Still, that’s the data that’s available.
Anyway, I wouldn’t take this table to be a definitive guide as to where you should be investing for maximum returns. Asset returns wax and wane over the years, and it’s important to be diversified as we can never be sure what will do best.
The point is that most of your money should probably not be in cash.
The latest iteration of the closely followed Credit Suisse Global Yearbook has just confirmed the same thing, as it has for many years. The 2018 edition reports that over the last 117 years, cash produced just 1% in annual real returns in the UK, compared to 5.5% for shares.
Over the several decades of a typical investor’s lifetime, the cost of sitting in cash is astronomical.

Time to cash out

I personally think everyone should have some cash. A chunk should be in an emergency fund for when the boiler blows up or your car breaks down.
You can also hold some cash as a financial (and emotional) buffer against market turbulence, and perhaps another allocation earmarked as ‘dry powder’ that you can use to cheer yourself up buying cheap shares when markets fall.
But with inflation running at around 3%, you don’t need the intellect of Darwin or the imagination of Austen to see how the real value of your money will be eroded over the next 20 years if you hold much more than that!

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.