For many people, keeping costs to a minimum is a way of life. Whether it’s food shopping, household bills, holidays, cars, or anything else, getting a discount is akin to a requirement that must be present before a purchase can be made.
Often, this leaves a pile of cash at the end of each month that can either be spent or saved in the eyes of most people. While there are some that spend everything, most people save at least a portion of their income each month and put it into a cash ISA or ‘high interest’ savings account.
This may seem like the right thing to do but, realistically, the money you are saving is becoming less and less valuable as the days, weeks and months pass by. That’s why having a large pile of cash in a bank account is a waste of time.
Real Loss
While at the present time inflation is just 0.5%, in the long run it is unlikely to remain so low. That’s because the oil price will not fall in perpetuity and the savage cuts in the price of food have an endpoint that will be reached. As a result, the below 2% interest rate on savings is unlikely to provide a real return in the long run – especially since it is taxed at a basic rate of 20% and, therefore, is 1.6% after tax. As such, an inflation rate of 2-3% (which is generally the long term average) means that the value of your cash is decreasing most of the time.
Real Return
Certainly, keeping an emergency supply of cash is essential. For example, 6-12 months of living expenses as cash is sensible in case you lose your job or require house or car maintenance to be undertaken. For the rest of your cash, though, investing it in shares could prove to be a far more prudent decision in the long run, simply because it is more likely to provide you with a return that is higher than inflation.
For example, the FTSE 100 currently yields over 3% and this means that even if inflation were to rise to its longer term ‘norm’ of 2-3%, you would still achieve a real return. And, with dividend yields being subject to no further taxation (unless you are a higher rate taxpayer), you could achieve around twice your after tax savings rate simply by investing in a FTSE 100 tracker fund.
Diversify
Of course, you may wish to buy individual shares and, in that case, yields of over 6% are currently on offer at FTSE 100, blue-chip companies. Certainly, your capital is at risk (while it is not up to a limit of £85,000 per institution in a savings account), but in the long run history tells us that if you diversify among a number of blue-chip companies, your chances of being down are not as high as you may think.
Therefore, while you work hard to earn and work equally hard to obtain discounts on food and other products, why not make your money work hard for you? By investing wisely, instead of saving, you could see your income rise at a brisk pace and help make your financial future an even brighter one.