Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
The Covid-19 pandemic has meant the risk of job losses and wage cuts for many households, but for others it has meant big savings from lower spending in lockdown.
New figures from the Bank of England show exactly how much the lucky ones have been managing to save as a result of the curbs on our activity. In its Money and Credit stats release for June, issued last week, the Bank said that households and businesses added £16bn in cash deposits in the month after banking an average £53bn a month from March to May. These compare to average monthly savings of just £8bn in the months leading up to lockdown.
Much of these savings will end up in current accounts where rates of interest are near to zero. Those who seek out a better return from the cash may be able to get rates of around 1% if they are prepared to tie their money up for a period.
The low rates on cash will prompt many to seek a higher return from investments. By investing savings in assets like stocks or bonds you are taking the risk that your money could lose value, which doesn’t apply to cash savings. But if you have built up sufficient cash savings, this risk could be appropriate.
How much cash savings do you need before you invest, and what should you bear in mind if you want to make those lockdown savings work harder through investing? Here’s our action plan.
Rainy day cash means you can forget market storms
Some cash savings should be built before investments are considered. If you have rainy day money separate from your investments it means that you’re less likely to have to raid investments if you need cash at short notice - which means you’re less likely to have to make a loss by selling investments when they have fallen in value.
How much cash should you hold before your take the plunge into investing? It can be useful to think of cash savings as being in separate pots for separate purposes, even if they are in fact held in the same account. There could be the money you think you need for real emergencies - perhaps a sudden loss of income when you’ll need to take care of essential expenses from savings. How much you need will depend on you but think about it in terms of your monthly outgoings. Holding savings worth three to six months of essential costs is often advised.
Then there are savings that you may wish to dip into more readily, and then replenish afterwards. If you have holiday plans or other large expenses that don’t come along every month, but perhaps every year or so, build some savings for this too. Again, this is personal, but it could be equal to a month’s gross salary.
If you have all these potential costs covered with cash savings, you could be ready to invest.
Drip-feeding means you’ll get more if markets fall
If you stick all your cash savings into investments in one go you will create the potential for a nasty cliff-edge, should markets take a sudden fall. This is perhaps the scenario that cash savers fear the most.
By setting up a regular savings plan, with a set amount fed from cash in to investments each month, you won’t be risking it all. If markets fall, that hurts the money you have invested but it means that the money you invest next month will buy more assets. You are buying low (or lower), which is a decent investing principle to follow.
When prices recover, as they tend to do in the long term, you’ll feel a bigger bounce.
The effect works in reverse when markets are rising but if you’re worried about markets falling, drip-feeding offers valuable peace of mind.
Cash on the sidelines
Experienced investors will often talk about holding cash “in reserve”, “off the table” or “on the sildelines”. For practical purposes, this may be money held within the cash facility of an investment account, investment ISA or Self-invested personal pension (SIPP).
It is there ready to take advantage of investment opportunities. Successful investing means buying low and selling high and having cash on the sidelines enables you to do it. If your assets fall in value, as they will from time to time, it could be a great time to buy more because you’ll get more assets for your money.
It’s not a good idea to switch wholesale in and out of cash - that amounts to attempting to time the market, which seldom works - but allowing cash reserves to build at the margin over time can leave you well placed to take advantage of opportunities when they arise.
More on regular saving
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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