If you put £10,000 in cash under the mattress you can go upstairs to check and it’ll still be there.
It won’t diminish but it won’t grow either, but you have comfort of knowing you can access it whenever you want and spend it straight away.
There’s no guarantee that what you can buy today will cost the same in future though, because the price of goods and services are influenced by prevailing interest rates and inflation.
Interest rates have fallen to 0.25%, but there’s speculation they’ll rise in the future. Inflation has already risen to 1.2% and there’s an expectation that the increase will continue, meaning that what we buy remains the same, but will cost more.
As the money isn’t growing it’s not keeping up with inflation, so in reality it’s going backwards and gradually becomes worth less as time goes by and if you’re burgled and the money is taken no-one will reimburse you.
The bank
If you want your money to grow you can put it in the bank. With online banking you can check and see it’s all still there from the comfort of your home and the bank pays you interest for depositing the money, which you’ll see added to your balance on a regular basis.
With full access you can withdraw money whenever you want and if the rate of interest offered is say, 1%, in a year’s time your £10,000 could grow to £10,100. If it’s a variable rate and interest rates reduce it won’t grow as much, but if they increase you’ll get more.
The bank may fix the rate at say 2% if you leave the money in for a longer period, say 12 months, so it will grow to £10,200 but if you want access you’ll lose some or all of the interest.
Inflation means that there’s still the same risk to your buying power, but if the bank is a UK authorised financial provider, savings up to £75,000 are protected in the event that the bank becomes insolvent, making it feel more secure.
If the rate of interest is lower than the prevailing rate of inflation it’ll have a similar effect to being under the mattress and the value in real terms will erode.
Investment
Putting the money away for longer without access could mean it grows by more than the rate of inflation, but also means taking the risk that the value could fall (as well as rise) in the future.
It’s likely you’ll see the value of your money fluctuate and depending upon what you invest in, the rise and fall can be sharper in some investments than others.
Usually you can still get access, but the longer you leave it alone the more chance it has to ride out the peaks and troughs involved in investing in the stock market. There’s no guarantee that you’ll get back more than you put in but this is the risk of investing. If the returns outperform cash and inflation then you’ve got more buying power.
A combination of the above will often meet people’s short and long term needs and there’s a risk involved with all forms of savings, so you just have to decide which risk is worth taking.
