Cash in the bank stops you achieving your life goals
What is it that you want to do with the rest of your life? More holidays? Pay for your children’s and grandchildren’s degree education? Live mortgage free? Retire early, and get your golf handicap down?
Whatever your lifestyle goals, you’re probably saving towards them. And you might be doing pretty well. According to a 2015 savings survey by Scottish Widows:
- 12% of people in the UK have more than £50,000 in cash savings
- More than half have up to £50,000 saved in cash
- On average, people are saving £105 per month
According to Aviva, in 2017 high-income families had £62,885 in their ‘piggy banks’.
All great news! Until you realise that your cash savings – even those in tax-efficient cash ISAs – aren’t accelerating you to your goals. They’re reversing you away from them. And every penny you save could be pushing you back further.
What is the difference between saving and investing?
Savings and investments are two entirely different beasts. Each has a different role to play in your financial management.
Putting a little away each month is essential. Having a reasonable amount of cash available for emergencies will stop them being emergencies. This emergency (or reserve) fund must be readily accessible. You pay for this accessibility, by accepting a lower interest rate – or no interest, if you save in a current account.
Investing, on the other hand, is using your excess cash to buy an asset that you believe has a good chance to grow in value or provide valuable passive profits (earnings and benefits that you don’t need to work for). The value of your selected assets may go up and down, but over the longer term, they should produce much larger gains than cash savings. This will speed you towards your lifestyle goals.
How much is your cash account costing you?
Your cash savings are costing you your future. According to moneyfacts.co.uk, the over-55s are most likely to save. However, though 75% of savers have an instant access savings account, and more than half have a cash ISA, almost 60% keep their cash savings in a current account.
Yet 56% of these savers are planning for their future. Long-term savings, not for holidays or rainy-day emergencies.
To figure out how much your long-term cash savings are costing you, all you need to do is compare its growth over 10 years against inflation over the same period:
- The best interest rate currently available on an easy access savings account is 1.32% (Bank of Cyprus, 26/05/2018). Over 10 years, your £50,000 savings will grow to approximately £57,000.
- The current rate of inflation is 2.4%. Were this rate of price growth to remain constant, something costing £50,000 today will cost approximately £63,400 in 10 years.
If you keep your cash in a current account, you won’t earn any interest. You’ll be reversing away from your goals even faster.
How much could property investment benefit you?
Over the long-term history of property investment in the UK, property prices have doubled, on average, every 8 to 10 years. That’s an average growth of around 7% to 8% per year.
Currently, house prices are growing a little slower than this long-term average, at 4.2% (Land Registry, March 2018). Even at this lower level of house price inflation, after 10 years your investment property would be worth approximately £75,500.
Even at this conservative rate of capital growth, an investment in property could make you £18,500 more per £50,000 invested in the next 10 years.
And if property price growth returns to its long-term average, you could double your money – outpacing general inflation by more than £36,000.
Supercharging your cash savings doesn’t stop there
Now, it’s hard (if not impossible) to find a property valued at £50,000 or less in the UK. But using your cash savings as a deposit could boost your returns even further.
Now, I’m not suggesting that you use all your savings as a deposit on a property investment; you should always keep a cash reserve for emergencies. But let’s say you put down £50,000 on a £200,000 property. Let’s say that the rental income pays your mortgage interest and costs, and the property price grows at an average of only 4.2% over 10 years:
- After 10 years, the property will be valued at approximately £302,000.
- This means your £50,000 investment will have grown to £152,000 (after repaying the £150,000 mortgage).
If property price growth returns to its long-term average, your £50,000 investment will grow to around £250,000. That’s the benefit of leveraging in property investment: the potential for £200,000 gross profit on a £50,000 investment in 10 years.
I have one question for you: will you achieve your life goals by keeping your cash savings in the bank?
To book a property investment strategy consultation, contact Gladfish today on +44 207 923 6100. We’ll discuss your goals, your financial position, how property can help you reach your desired lifestyle faster… and how you can structure your investment to pay less tax, too.
Live with passion and fun,