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Mind the Gap - Managing your Cash Effectively
Over a small number of recent years’, we have seen a pandemic, a cost of living crisis, interest rate hikes, geopolitical conflicts in Europe, domestic political instability and a climate crisis which have had a profound impact on us, not only as a country, but on an individual basis.
Through all this uncertainty, instability and sudden changes in our lives, our cash and savings, have played a vital role in providing the liquidity, security and flexibility needed to get us through. It has highlighted the importance of actively managing our cash and savings and with the highest paying instant access account now at 5.25%, there is even more incentive to do so.
A campaign called ‘Get paid, not played’ by Atom Bank shows that £5bn in profit had been made by big banks in the first quarter of this year. This was a 43% increase on the same period last year, proving beyond reasonable doubt that there is no reciprocation for our loyalty.
However, not all the blame can be put on the banks. The research found 49% of adults have never changed their savings provider and 15% of savers are still in accounts opened in 2017 or earlier.
This inertia can usually be attributed to the perceived difficulty, time and administration involved in setting up and moving cash to new providers on a frequent basis. The amount of cash involved therefore, tends to be positively correlated with the level of inertia observed, meaning low risk investors and high net-worth individuals are particularly affected.
While there are principles and steps that must be taken to maximise the value of your cash over the long-term, these need not be difficult, time consuming or burdening and there are solutions that let you have full discretion about your level of input.
How do I manage my cash effectively?
We feel our approach to cash differentiates us to most other financial advisers. We understand the important role cash plays in a wider portfolio and appreciate that not everyone needs nor wants to be fully invested in the markets. This is our starting point and has helped us in developing clear and simple strategies for our clients to deploy.
To take control of your cash and maximise its value, you must follow these simple principles:
Have a plan – and understand what you want and need from your cash and savings.
Do not be over loyal – and research the entire market to maximise your rates of return.
Protect your capital – Banks and Building Societies can go bust and you can lose your money. Do not leave this to chance and ensure you stay within FSCS limits and checking the financial strength of the banks you are using.
Meet your short-term needs – and only retain the amount you need available to use over the next 12 months on Instant Access.
Save for the longer term – by building a portfolio of Fixed Term accounts, spread up to five years, with the balance.
Make a financial decision every year - Interest rates change and become dormant. Ensure you review your accounts every 12 months, just like you do with your home insurance, your energy bills, your car insurance etc. With an account maturing each year, you will never be more than 12 months away form a new tranche of capital.
How do I simplify the process of managing my cash?
For those with smaller pots of money under £50,000 and who only need personal accounts, the most straightforward approach is to research online to find the accounts paying the highest rate of interest. Each month, our blog releases the latest top interest bearing accounts so you can use this as a starting point.
If your circumstances are more complex or you don't have the time, resources or willpower to do your own research then as a client, you can access our Cash Management service at no cost. We will carry out the research on your behalf and provide you with a report that outlines where your cash will earn the highest rate of interest, while taking account FSCS protection limits and the financial strength of the bank looking after your money. You will then need to apply to the banks directly to set up the accounts. Each year, we will be in touch to help renew any accounts that have matured and carry out any research you need from us. This is particularly useful for those who need to set up cash and savings accounts within their pension, ISA, business, trust or charity as information about these accounts is not as readily available online.
It is clear setting up new bank accounts and moving your savings each year is rather inconvenient and probably the main reason why so few do so. Fortunately, there are now solutions available to tackle with this inertia.
For those who prefer a completely hands off approach of managing their cash or where there is a significant amount of cash that needs to be spread over several accounts to maintain FSCS protection, we are now able to offer a Cash Platform to our clients. In the same way a pension provider can hold and allocate various investments, a Cash Platform provider can set up, manage and renew maturing accounts on an ongoing basis, on your behalf. Only one application form is required at outset and once setup, your cash will be automatically moved into the highest paying accounts each year. The provider will charge a small proportionate fee for the service, usually 0.25%.
What are the benefits of managing my cash?
At the time of writing, the highest instant access account is offering 5.25%, whereas the highest five year fixed rate account will offer 5.50%, just 0.25% extra and not much incentive to tie up your money for the long-term. The reason for this is that there is just as much uncertainty over the short-term as the long-term and banks have priced this in.
However, although it appears inflation will continue to outstay it’s welcome for some time yet, it will slowly reduce and interest rates, including those paid on instant access accounts, will duly follow. Once a sense of security and stability has returned, you will see the appropriate level of premium applied to longer-term accounts and cash left dormant in instant access accounts will quickly begin to erode against the effects of inflation.
Adopting a portfolio and actively managed approach to your cash, will ensure your accounts never become dormant. The graph below shows a timespan of 28 years from January 1995 to March 2023.
The line at the bottom shows the return achieved by leaving your cash in dormant accounts which are never changed. You can see over the same time period, the silent killer of savers Inflation (RPI) has increased by 151.1%. The next line ‘Savings Interest Growth’ shows the return achieved by actively managing your cash and also factors in basic rate tax.
For example, if you had £100,000 held in dormant accounts back in 1995, this would have grown to £107,000. Inflation during the same period would have risen to £251,510 and eroded the value of your savings by 58%. If you had actively managed your cash throughout this period, the value of your savings would have grown to £269,000.
Therefore, despite the banks not always passing on rate increases to savers, it is still possible to maintain the value of your savings against inflation by actively managing your cash over the long-term.
Should I still be invested in the markets when I can achieve 5% risk free in savings accounts?
The decisions we make in life are usually driven in some part by our underlying emotions, but when it comes to our money, our emotions play a much bigger role. When markets are rising and the news is optimistic, we tend to be risk takers but when markets are falling and doom and gloom is everywhere we tend to avoid risk.
Going further than that, a basic feature of our psychology as humans is negativity bias - in that we are more affected and naturally inclined towards the negative than we are the positive. It means we dread losses more than we enjoy equivalent gains and remember bad events longer than good events. We usually see in opinion surveys our assumptions are systematically more pessimistic than the reality on key topics such as poverty or crime.
This natural emotional response means we are tempted to sacrifice our long-term priorities for immediate emotional comfort. When it comes to investing, this usually means exiting the markets and selling when prices are low only to return and buy back into the markets when prices are high.
Understanding these natural emotional responses and how we react to them is key in helping us to make logical, clear and pragmatic decisions when it comes to our money.
Putting emotions aside, we can look at the data to better understand the role that cash plays in your overall portfolio.
Cash as an asset, is there to provide liquidity in the short-term or a low-risk portfolio which preserves its value over the long-term. We know from the data above that the value of cash doesn’t grow in real terms, however in order to achieve your goals whether that is to enjoy a better retirement, leave a bigger legacy, pay for school fees or buy a bigger house, some level of growth is needed. This is the role of other types of assets.
It is important to have a certain portion of your portfolio held in cash across both instant access and longer-term periods. The allocation of how much this should be will depend on a number of factors and this should only change if the underlying factors change.
However, trying to chase or time the markets by increasing your allocation to cash during times when interest rates are high and markets are low can be an expensive decision.
History has shown that when interest rates and inflation fall, the markets typically begin to rise and recover. This can happen quickly and being out of the market, even for a small number of days can significantly reduce your overall returns and extend the timeframe of your capital recovering from its initial fall by years.
The chart below shows that time in the market is usually more successful than timing the market. It shows staying invested in global equities over the past 30 years, could have delivered a potential return more than four times greater than that of an investor who missed the best 25 days during the same period.
The chart below shows a period of five years over the financial crisis of 2008. In fact we can take nearly any five year period and two trends nearly always occur. Either markets continue to outperform cash or alternatively there is a period of time where the rates available on cash deposits outperform markets when they fall. After a further period, markets recover and continue to grow and cash continues to grow steadily, sometimes ahead and sometimes behind of inflation.
To summarise, short-term volatility in the markets is disturbing and this has certainly been heightened with the prolonged amount of turbulence and economic uncertainty we have experienced since the pandemic. However, by understanding how our emotions play a role in the decisions we make with our money and looking at the facts and data from previous periods of uncertainty and instability, we can find the reassurance we need to stand by our financial plan.
Can I access NS&I and Savings Accounts provided by Banks within my pension?
Yes. Some pension providers will allow you to do this, and Savings Providers will have specific Pension accounts or in some cases Trust accounts which can be used.
There are also special accounts that can be used for Power of Attornies, ISAs, Charities, Businesses and Children.
The level of past performance is not indicative of any future potential performance. All performance figures can fall as well as rise. There are no guarantees to any level of future performance.
The value of pensions and investments and the income they produce can fall as well as rise and you may get back less than you invested.
We accept no liability for any inaccuracies or mistakes in any of the figures. The representation of the information obtained is purely based upon our interpretation of the data provided to us.
Social, ecomonic and commercial legislation is subject to change, at any time, which would affect future returns available.
The levels of personal and commercial taxation are subject to change, at any time, which would affect future returns available.
The values of the indexes used have been taken on the 1st working day of each month or from the format provided by the sources. The information has been obtained from the following:
FTSE 100 Index from Yahoo Finance.
RPI from Inflation.eu.
Average Earning Index from Royal London (NAE Values to Dec 2009 & AWE Values from 2010)
Savings Interest Gross (Interest rate figures obtained from the Building Society Association from 1995 to 2011 and Deposit Sense figures from 2011) (The interest rates have then been used to construct savings portfolios to determine the portfolio interest rates had a new portfolio been constructed each month) (This reduces the overall rate of interest obtained over the long term and is therefore a conservative representation of savings) (It is also assumed that Basic Rate, Higher Rate and Top Rate have tax deducted at 20%, 40% and 45% for the full duration of the term) (No account has been taken for the value obtained from the Personal Savings Allowance that was introduced for Basic Rate and Higher Rate tax payers, in April 2016)
The Mixed Asset Managed Growth Fund from Prudential.
Average House Price from HousePriceCrash.co.uk.
Dormant Rate of Interest is a measured assumption from 1995 – 2011 based upon the Bank of England Base Rate and from Deposit Sense figures from 2011).