Are you wondering what to do with spare lockdown cash?

It’s safe to say, the last 18 months has felt a really long time and the UK’s three national lockdowns have certainly taken their toll.

There’s been many a social event, holiday, special birthday or wedding cancelled due to COVID-19 but there does appear to be a light at the end of the tunnel.

Whilst we are all hoping for a return to normality ASAP, you may have noticed that over the last year your outgoings have reduced somewhat and savings have increased. The question is, do you want your surplus cash to work harder for you?

Interest rates on UK bank accounts are in the doldrums, and many of the best accounts right now involve long-term tie-ins that are enough to make anyone think twice. However, keeping it in the bank is unlikely to achieve your financial goals and ultimately, can be costly.

Why holding too much cash can be a mistake

We always recommend holding a certain level of cash to meet ongoing expenditure and also to allow for a rainy day, however holding too much over the long-term can be detrimental.

This is because inflation can gradually eat away at the spending power of cash. Over the last 12 months, inflation has risen by 2.1% (measured by Consumer Prices Index up to May 2021 – Office of National Statistics) therefore if your savings are returning less than this each year, its spending power is diminishing.

Example: 

Let’s say you put £100,000 in a savings account that pays 1% interest. After a year, you will have £101,000.

If the rate of inflation is running at 2.1%, you would need £102,100 to have the same buying power.

As you can see, you may have gained £1,000 but at the same time lost more than this in buying power. 

In other words, if your savings don’t grow at the same rate of inflation, you will effectively lose money.

This may not seem like a lot at first but the cumulative effect can be expensive – the longer you keep surplus money in a low interest bearing account, the more this gap widens, and even more so for large holdings of cash.

What should I be doing?

Before we take a closer look at getting your money to work harder for you, there’s a few steps to take first:

• Plan for the unforeseen

We would always recommend having an emergency fund.

Ideally, this would be enough to cover at least one – two years’ expenditure, providing you with the peace of mind that you’re able to cover your costs in the event of an unexpected bill or loss of income.

The main goal for this pot of money is not to earn interest but to be readily available should you need it.

• Compare bank rates

It is always worth asking your current bank if the account(s) you currently hold is the best one for you.

It may be beneficial to hold your emergency fund savings in a separate account to your main account – that way its less tempting to dip into.

• Reduce your debts

It’s a good idea to take a closer look at all your finances to reduce any outstanding debts, such as credit cards or loans.

This will reduce your regular outgoings and you will save £££’s on interest over the long-term.

If you are thinking about reducing your debts and in particular your mortgage, we recommend speaking with your Financial Planner before taking any action, as investing may be a more efficient option, depending on circumstances.

• Spend on you or a loved one

Its also a perfect opportunity to think about whether you want to treat yourself and /or your family to anything you or they may have missed out on during lockdown.

We all know holidays, weekends away and family fun days have been sorely lacking in the last year.

If gifting to family or charity is something you want to consider, our planners can specifically help with your inheritance tax and intergenerational plan or as part of our overall financial planning service.

Once you’re happy you’ve taken the right steps for your circumstances, the next step is to consider whether investing your surplus cash is the right decision for you.

Why should I invest my money?

Saving money is great for the short-term but the low interest rate environment is likely to mean your cash loses its spending power. On the other hand, although investing your cash does increase risk, it also gives rise to the potential of your capital keeping pace with or even exceeding the rate of inflation.

Of course, there’s always a chance you won’t get back what you put in, which is the measured risk you take, although it’s worth bearing in mind that the longer your investment time-frame, the greater chance you have of making a positive return. In addition, not all portfolios carry the same level of risk.

Our investment approach is simple – to seek an appropriate balance between risk and return and to ensure the risk is taken in the right place.

This is driven by our investment team who developed and continuously manage a range of portfolio funds which target increasing levels of return at consequently rising levels of risk, starting with our ‘Defensive’ fund which holds approximately 10-25% in equities, to the other end of the spectrum, our ‘Global Equity’ fund which holds at least 80% in equities.

Our ‘Defensive’ fund could be ideal for those who don’t want to subject their ‘lockdown’ savings to too much volatility but want a better return than cash.

This fund aims to increase the value of your investment over any rolling 3-year period through a combination of capital growth and income paid out of investments. Over the longer 5-year period, it aims to return 3% above current cash rates (measured by the Bank of England base rate).

There is also the Equilibrium Positive Impact Portfolio (PIP), which only invests in funds or holdings which Equilibrium or managers of the funds believe can make a positive difference to achieving the UN’s Sustainable Development Goals (SDGs).  Equilibrium believes that companies who actively have a positive impact will also be winners for investors over the long term. Those that are doing harm will be losers and can present a big risk to portfolios.

Is now the right time to invest?

This is an age-old question – should you jump on the bandwagon during a market upturn, or wait for the perfect opportunity of a market dip?

We believe there’s no better time to invest than right now.

No-one knows what the future will bring – we only need to look at the last 10 years with the 2020 global pandemic and recession, US/China trade wars, the Brexit vote and the Greek debt crisis to name but a few major economic events.

Questioning ‘what’s going to happen next’ in the stock market is not an investment strategy – time can be better spent taking a position on the market and prudently investing in a well-diversified portfolio. As the old saying goes, ‘it’s time in the market, not timing the market that matters.’

Take a look at our series of short videos by our founder and Partner, Colin Lawson, Human Doings – how are we all?, in which he explains how we can help find certainty in a very uncertain world.