A well-managed investment plan isn’t just about how you make money over time, it’s also about aiming to protect and preserve it. So many people choose to put their money into a savings account because they find the uncertainty of the market concerning. Investing does involve some risk and there’s a chance that you could get back less than you put in. But there’s also potential for higher returns which preserve their real value over time. So, if you’re really looking to safeguard the value of your wealth for the future and can afford to invest for a longer time period, it could be an option.
1. Investing can help protect your money against inflation
An uncomfortable truth is that generally over time, the level of inflation can be outpacing the amount of interest you are getting on your savings. Or to put it another way, your cash could be declining in purchasing power. One 2019 study finds that the average UK saver will have lost around £500 last year as inflation outpaced the rate of interest1.
As a result, if you have a nest egg in a savings account, which you want to preserve for more than five years, keeping your money in a bank account may not be your best option.
How will inflation impact my savings?
Imagine yourself as a great grandparent. How do you look? Perhaps you are cosy on a rocking chair, decked out in groovy slippers, sipping a sherry and looking around at your home. How much annual income do you think you would need? Will you be a homeowner or renter? How much should you have squirrelled away in your savings? What about your heating and healthcare costs? How about extra support and home help?
If you’re planning your future finances, don’t forget to consider inflation and its impact on your end goals – it’s the number one enemy of long-term cash savings!
Inflation is the sustained increase in price of the same good or service, this means that over time you can buy less and less with the same amount of money. How much you can buy with your money is known as your “purchasing power”. Take a look at how the UK Freddo chocolate bar’s price has increased steadily over time, by 2030 it is anticipated to hit 38p2. The chocolate is the same, the price is not.
For small chocolate bars, this may seem trivial. However, when it comes to your lifetime savings, and your retirement, it’s very serious. Unless your interest rate matches or exceeds the rate of inflation, your money will be worth less.
So how does investing protect against inflation?
Think of your money sitting in a savings account, getting slowly eaten away by inflation over time. That image of yourself as a great grandparent … the picture is getting bleaker, right?
But imagine if you had instead invested the money in a way which stops inflation in its tracks. This is where sharesinflation-protected bonds, commodities and property come in. Think of them as the superheroes of inflation protection. These types of investment can save the day and help brighten your future by preserving your purchasing power – the real value of your money.
The finance industry has factored inflation protection into many of its investment products. In some cases, it is a natural bi-product, such as with shares. This is because your returns are linked to the performance of your company, and you own a slice of a company, rather than a sum of money. Shares are protected against currency inflation, but there is more risk involved. In other investments, it is deliberately worked into the product as a feature, for example with US TIPS (Treasury Inflation Protected Securities).
2. A good mix of investments can help shield your money against market downturns and currency depreciation
Currency depreciation simply means when one currency becomes worth less compared to another one. You may have experienced this once or twice on holiday if you exchanged your pounds for euros, dollars or any other currency, and got back less than you were expecting. If all your savings are kept in one currency – like the pound, in one bank or building society, then all your eggs are in one basket. It may be a basket which is unlikely to tank … but it’s still one basket, and if it unexpectedly falls, you’ll likely lose everything you put in it.
By spreading out your money across regions and investment types, you won’t lose it all if one sector or location nosedives. If you have ever taken out a wad of cash, for example at the start of a holiday, have you ever kept some money in a wallet, some hidden in your hotel room and another bit in a sock just in case? This is the same thing. To help protect your wealth, it could be worthwhile to keep a bit in a savings account, a bit in an investment plan and a bit somewhere else.
For most investors, having a strong mix of different types of investment is key. To spread out your risk, and avoid currency depreciation it is good practice to invest in a few different countries and currencies. People who have some of their money tucked away in investments which are in the euro, Swiss franc, U.S. dollar, Canadian dollar or Japanese yen won’t feel the hit of depreciation on their purchasing power as much as those who are only invested in the pound.
Within one investment plan, you can have an extraordinary amount of diversification which really helps spread your risk and stop currency depreciation. For example, at Wealthify, our expert investment management team use mutual funds to give you access to over 9,000 global companies with an investment of just £1. Read more about how we have managed to achieve this for our customers.
3. Preserve more money by using your ISA allowance
Tax allowances. It may not be the most glamourous or Instagram-able topic de jour, but it can make a real difference when preserving your wealth.
Go back to imagining yourself as a great grandparent. There are two versions: The bleaker version where inflation has eaten away your bank account savings, and the brighter one where you have helped to preserve your wealth from inflation, currency depreciation and market crashes. Now picture a third version, one where you didn’t pay income and capital gains tax on any gains you made.
Since 1999 more than £30 billion3 has been saved from the taxman by ISA holders. This is a hugely effective way of preserving your money for the long term. If you would like to find out more about how you can save on this tax, and begin investing some of your money, our Stocks and Shares ISA page could be a great place to start. By taking advantage now, you could thank yourself in years to come.
The main advantages of a Stocks and Shares ISA are that you get tax breaks on profits (known as “capital gains”) and interest (“income”) which you earn over time. You can get these tax breaks for any money you invest up to £20,000 (subject to change). When the new tax year begins in April, your £20,000 allowance renews. So, for example, over 5 years you could get tax relief on up to £100,000, based on present rules. Investing as often as you can and as much as you can afford could seriously pay off over time with a Stocks and Shares ISA.
Getting started is simple
Doing more to shield your money can be hassle-free. There are a few different options, and it’s always a good idea to look around and find the best option for you.
Here at Wealthify, our team has created some ready-made investment plans to suit all different risk levels and budgets with low fees. Simply create an account online and deposit your minimum investment and we’ll do the rest. We check and rebalance your investments whenever needed, and always have our eyes on the market for you.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.