You might think it strange for me to be suggesting that saving small amounts of cash regularly in 2020 would be a bad idea. After all, the Fool UK philosophy has always been that it’s never wrong to put some money — any money — aside in an attempt to grow your wealth. Indeed, it’s something we vehemently encourage.
Perhaps I should be more specific. In saying that saving money is a less-than-optimal strategy, I’m merely suggesting that using any kind of cash account for this purpose won’t do your finances much good. Here are three reasons why.
1. Interest rates are staying low
The level of interest offered by cash accounts has been historically low for a long time now. Thanks to ongoing jitters over the global economy, I can’t see this situation changing radically over the next few years, let alone in 2020. News last week that one of the largest banks in the UK, Santander, will reduce the interest it pays those holding its popular 123 current account (from 1.5% to 1%) speaks volumes.
For me, this makes it even more of a priority than usual to pay down any high-interest debts before thinking about saving a single penny. This is particularly relevant in January as many of us will have splurged on credit cards over the festive season.
Dealing with a financial hangover sooner rather than later is always the best solution.
2. Inflation erodes value
Aside from having a fund for life’s emergencies (such as replacing a broken boiler), I’d keep as little of my savings in cash as possible for another reason other than the fact that the interest paid can’t match that charged on any debt.
Inflation — the rise in the cost of goods and services over time — isn’t known as the ‘silent wealth killer’ for nothing. True, it may have fallen to its lowest rate for more than three years in December (1.3%, according to the Office for National Statistics) but this is still higher than the interest offered by the vast majority of Cash ISAs or bog-standard current accounts. This means the value of any saved cash isn’t growing at all. In most cases, it’s actually losing its buying power.
To make matters worse, the fact that current inflation is lower than the 2% targeted by the Bank of England could force another rate cut later this month, which would be more bad news for savers.
3. Stocks pay you
It won’t come as a surprise that I believe the best place to put whatever wealth you have is the stock market, particularly if you have no plans to retire just yet. Research has consistently shown that equities provide the best returns over the long term. Cash, by contrast, is the worst-performing asset.
Owning stocks in established, profitable companies should ensure your money grows above inflation, but another big attraction to investing is that many listed businesses pay out a proportion of their profits to their owners on a regular basis.
Although simply buying the highest-yielding shares should be avoided (this is usually an indication that the dividend is likely to be cut), those investing in some of the UK’s biggest stocks can still pick up yields of between 4%-6%. Compare that to the paltry rates offered by cash accounts and the decision is a no-brainer, in my view.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.