In the not so distant past, cash was king. Notes and coins regularly exchanged hands, but as technology improves and it’s now possible to pay with just your smile, as well as the global pandemic altering spending habits, the need for physical cash is declining. This coupled with fears of rising inflation and low interest rates, begs the question: is cash still king?
Last year, in a bid to stimulate the economy amid the early stages of the pandemic, The Bank of England slashed the base rate from 0.75% to 0.25% and then further again in short succession to 0.1%; the lowest it has ever been historically.
Despite the low interest rates, people remained cautious and continued to invest in cash. Research commissioned by brokerage HYCM found that cash savings were the most popular asset class throughout 2020, with 78% holding money in cash, and a third (32%) said they would put more in over the next 12 months, compared to only 21% saying they’d buy more shares.
Is cash still king in 2021?
As we’ve seen restrictions start to lift, we’ve also seen a dramatic increase in public spending – at least, that’s what the queues outside Primark would suggest. Research by Scottish Friendly and the Centre for Economics and Business Research supports this notion, predicting 26% of excess savings accumulated during lockdown will get spent as the economy reopens.
But is the cost of everything on the rise too?
In March, UK inflation increased due to the higher cost of petrol and clothes, with CPI (Consumer Price Index) rising by 0.7%, up from 0.4% in February 2021. The Bank of England has forecast that inflation could reach 1.9% by the end of 2021. Although, economists predict that inflation will exceed 2% sooner than that, with the increased demand for goods and services post-lockdown and a rise in household bills on the cards.
So, how does this affect cash? As a general rule, cash savings are the worst hit by inflation and are rarely able to keep pace, especially in times of low interest rates, which means savers can buy less with their money over time. However, cash is low risk and still has a place in every financial planning strategy. It’s all about making the right choices for you.
Making smart investment decisions
When deciding how and where to invest your money, you need to think about a few things first, but diving right in:
Set your savings goals
You’ll need to know how much you have to invest and what you’re saving for first of all, and then you can decide how long you want to invest to reach each of your savings goals.
Then you’ll know how much to allocate to different strategies over the short, medium and long term.
Saving for longer-term goals gives you more time to ride the peaks and troughs of the market, so you can potentially afford to take a bit more risk with this pot.
For your shorter-term goals, you’ll want to have access to this money sooner, so it makes sense to invest it in lower-risk assets, which are more liquid or easily accessible, such as cash.
Find the right balance
Diversification is the answer to finding the right balance between risk and return.
If you spread your investments across different assets, you inevitably reduce the risk. It’s the age-old case of don’t put all of your eggs in one basket.
For more on diversification, read the five top tips for diversifying your portfolio by Which?.
Always be prepared
Planning for life’s unexpected events is something we should all do, and lesson one always starts with your emergency fund. Life often has a way of tripping you up when you least expect it, so having a cash cushion to soften the fall is essential.
And for this reason, although it’s uncertain if cash is still king, cash remains an essential part of anyone’s financial plan.
If you have any questions or want to discuss your investment strategy, please get in touch and speak to one of our trusted financial planners.