It doesn’t take a genius to realise that locking up your money in a cash account can have a serious impact upon your wealth.
According to Moneysupermarket.com, the best easy-access cash ISA currently on the market is offered by Paragon Bank. Its 1.25% AER interest rate could be considered paltry at the best of times, but with inflation squashing over this figure (CPI stood at 2.4% as of June) it could be argued that these accounts are actually working against you as the value of your savings steadily erodes.
Cash returns are crumbling
The stark danger in going for the low-risk option and opting for a cash account was laid bare by a recent report by think tank Social Market Foundation (SMF).
In its ‘Saving Better’ report it cautioned that money stored in instant access cash savings accounts during the past five years would have fallen by over 4% in value in real terms due to the impact of rising inflation.
SMF advised that 6.8m Britons really aren’t making their money work best for them, these people holding more money in cash assets than they would require to cover any ‘rainy day’ needs. In its report the organisation estimated that as much as £200bn worth of savings that are excess to any rainy day requirements are currently held in cash accounts.
Based on this figure, SMF estimated that savers have lost around £8bn in value from their savings over the last five years.
Here comes a perfect illustration of the power of stock investing.
SMF advised that, had this £200bn been put to work by being invested in the FTSE 100, this money would have swelled by 47% in value in real terms. This amounts to a jaw-dropping £94bn.
As the SMF commented (rather obviously!): “The value of moving funds in excess of requirements for rainy day savings into less liquid or riskier asset classes could be significant.”
Late to the party?
There were even more figures to suggest that millions of Britons are setting themselves up for a fall come retirement, a topic I’ve covered in some depth before.
SMF said that a shocking 26.5m working age adults in Britain don’t hold adequate asset balances in either rainy day or pension savings. To boggle the mind still further, it said that a staggering 14.4m working age adults in the UK are not saving at all.
“Despite the best attempts of policy makers, regulators and consumer groups, UK households do not save enough. The clear links between saving, wellbeing, living standards and economic growth make the UK’s poor saving performance a major social policy concern,” the think tank said.
It’s clear that by not taking the bull by the horns, many of us could well be endangering ourselves by investing in the wrong places or by not investing at all. It’s never too late to start, however, and thankfully there’s no shortage of investment experts like The Motley Fool that are ready and willing to help you to protect yourself in retirement. So get on it!
Do you want to retire early and give up the rat race to enjoy the rest of your life? Of course you do, and to help you accomplish this goal, the Motley Fool has put together this free report titled "The Foolish Guide To Financial Independence", which is packed full of wealth-creating tips as well as ideas for your money.
The report is entirely free and available for download today, so if you're interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Moneysupermarket.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.