Making the most of cash savings

This article is part of
Guide to cash management

Making the most of cash savings
Pexels/Andree Taissin

Keeping money in cash has gone out of fashion in recent years, as a result of low interest rates and savings accounts offering very little.   

But at the moment many people may have cash to spare as a result of the pandemic. Unable to go on holiday or working from home has meant that some have amassed sizeable sums.

Data from the Office for National Statistics, published in September, found that UK households reduced their spending during Covid-19 by an average of £109.10 per week.  

Alex Shields, chartered financial planner at The Private Office, says: “The reduction in spending as a result of lockdown was a good opportunity for some people who have not saved before to build up some cash reserves, and in some cases these have been quite significant.”  

Whatever the amount saved, the money may be sitting in bank accounts earning very little while people ponder what to do with their unexpected windfall. So, this could present an opportunity for advisers to show clients what they could do with these savings.  

But Simon Merchant, co-founder and chief executive of cash deposit platform Flagstone, cautions: “Often, advisers may not be aware of the complete picture of their clients’ cash holdings, which can prevent them from providing timely and effective holistic advice.”  

Jason Hollands, managing director – corporate affairs at Tilney Smith & Williamson, emphasises that there are good reasons for holding cash in the first place.

“Everyone needs some cash reserves for short-term needs and emergencies, so it clearly makes sense to hold a cash buffer, even when returns are very low.” 

But balance is key, as he explains: “While amassing a vast cash war chest can provide a warm sense of financial security, it is to some extent a false one.

"Clients will be guaranteed to become worse off in real terms as the future spending power of their hard-earned wealth will be steadily eroded by the ‘silent assassin’ of inflation.”   

Scott Gallacher, director and chartered financial planner at Rowley Turton, takes a similar view: “Unfortunately, with rates where they are currently, savers need to decide whether or not the certainty of cash is sufficient enough of a benefit to offset the inflation erosion they are experiencing.

“A saver with £100,000 on deposit might earn a little over 1 per cent on a variable deal, but with inflation currently over 3 per cent, they are in effect losing 2 per cent a year in real terms.

"The impact of 3 per cent inflation on the 'real' value of £100,000 of savings earning 1 per cent is equivalent to burning more than £150 every month.” 

How to spend or save it 

When considering what to do with the cash, Hollands says: “It is important to stand back and consider the overall balance people have between savings and longer-term investment and whether this is optimal, and for them to potentially shift excess cash balances into funds, as well as pay down any debts where the servicing costs might be high.