You might think that in the current environment, savings levels across Britain would be well down. After all, millions of people across the country have either been furloughed and taken a pay cut, or lost their jobs completely.
However, in reality, it’s quite the opposite. Believe it or not, Britons are saving money like never before. According to Bank of England data, households’ deposits increased by a record £25.6bn in May, following strong increases in both April (£16.7bn) and March (£14.3bn). By contrast, in the six months to February 2020, household deposits rose by an average of just £5bn per month. Clearly, many people have been able to save money during the lockdown.
If you’ve saved up a decent amount of money in 2020, that’s great news. But what do you do with it now?
You’ve saved money: what now?
The best place to invest a lump sum will depend on your financial goals and risk tolerance. Of course, before you think about investing a lump sum, it’s important to ensure you’ve taken care of personal wealth management basics. Have you paid off high-interest debt such as credit card debt? There’s no point investing your money if you’re paying a ton of interest.
And have you built up a robust emergency fund so that you have plenty of cash available for emergencies? This is important in the current environment. These are the things to take care of before investing your money.
Short-term vs long-term goals
If you’ve sorted the basics, the next thing to do is think about your financial goals. Are they short-term or long-term focused?
If they’re short-term focused, your best bet, in my view, is to keep your money in either an easy access savings account or a fixed-term savings account.
You won’t get a great interest rate with either option unfortunately, because interest rates are abysmal at the moment. You might be able to pick up a rate of around 1% if you’re lucky. But at least your capital won’t be at risk. That’s important when saving for short-term goals.
Building long-term wealth
If your goals are more long-term focused (five years-plus), your best option remains the stock market, in my view.
The stock market is volatile in the short term. However, in the long run, it tends to produce returns of around 7-10% per year, on average. That’s far higher than the returns from other asset classes, such as cash savings and bonds.
It’s possible to do much better than that too. For example, one of my favourite investment funds, Fundsmith, has returned about 19% per year over the last five years. You can invest in funds like this effortlessly these days through platforms such as Hargreaves Lansdown and AJ Bell.
Your returns can potentially be tax-free too. Invest within a Stocks and Shares ISA or a Lifetime ISA (LISA) and you won’t pay any tax on your gains.
Of course, stock market investing is riskier than keeping your money in the bank. It’s important to be fully aware of the risks.
I always say that the best approach to investing in the stock market is to invest bit by bit. This strategy can reduce the risks of investing at a market high and help you build your wealth more effectively over time.