Is now the time to stop saving and start investing?
Compound interest is often referred to as the ‘eighth wonder of the world’ and for good reason. Even a small sum of money left to gain interest on its interest can grow to become a healthy lump sum over time, if you’re willing to wait for it.
However if you’re relying on a savings account to deliver interest you could be waiting a long time.
With the Bank of England keeping the base interest rate at a historical low (0.25% compared to 5.75% in 2007), your money won’t work very hard for you if it’s in an account which tracks this percentage.
Add to this the rising cost of living, which is currently increasing at a faster rate than average wages (inflation recently hit a four year high of 2.9%) and it’s not difficult to see why savings are being eroded as people dip into them just to get by.
The answer may be to consider investing as it can magnify the opportunities to grow your money – appealing to savers who are looking to be more proactive with their finances.
Many economic factors can influence how markets, and as a result, your investments perform. This often puts people off using this method to build their savings, but it needn’t.
From elections in the UK, France and the US to Greece and Italy’s economic woes, this is certainly a time of change.
Yet it is often during times of uncertainty that real investment opportunities arise. And although savings accounts are currently providing very low returns on your cash –hovering at around 1-2% interest since 2013 – the FTSE 100 has reached an all-time closing high of 7,547 points already this year. Year on year this means that investors would have benefited from a return of 5.32% for 2017.
Save or invest?
Saving and investing both require discipline and commitment, so switching from one to the other is not a giant leap of faith, think of it as more a change of focus to suit your circumstances and future plans.
Investments can go down as well as up, so it can never be a 100% risk-free activity. That is why some people prefer to save money in a more traditional way. Our saving vs investing infographic looks at some of the key considerations.
If you’re saving for a holiday-of-a-lifetime next year, investing may not be the best option at the moment, but if you want to grow savings to buy a property in 10 years’ time, or put money away for your children’s education for example, it could be more appropriate.
Investing is often more suitable if you have more than three years to achieve your goal but every individual has different financial circumstances, and investing is a personalised experience that is highly dependent on your own attitude to risk and capacity for loss.
The amount of time you’re willing and able to put your cash away for is the most important factor, so always think about your long-term financial plans before making a decision.
Capital at risk. The value of your investments can go down as well as up.
The information in this article is for private circulation and is believed to be correct but cannot be guaranteed. Opinions, interpretations and conclusions represent our judgement as of this date and are subject to change. The information contained in this article does not constitute a personal recommendation and the investment or investment services referred to may not be suitable for all investors; therefore we strongly recommend you consult your Professional Adviser before taking any action. Copyright: Investec Click & Invest Limited. Reproduction prohibited without permission.