Whether you’re saving or investing, generally the aim is to try and increase your wealth. But as the amount you have starts to build up, you may become aware of a balancing act – trying to turn a profit while also protecting your savings. But how do you strike the right balance?
Is your focus on making a profit or protecting what you have?
Not everyone is the same. Some people may read this and think, I want to make as much money as I can and I’m willing to take any risks, while others would rather keep their money safe and not take on any uncertainty.
There are a few things that may impact the approach you take, from the level of risk that you’re happy to accept, to how long you’re saving for, what you’re saving for, and your current financial circumstances.
Why you may want to protect your savings?
This question sounds relatively straightforward, right? You’ve built up your money and you want to keep it. That’s entirely logical, but do you know what you’re protecting it from, or even how you go about it?
There’s the worry that you might lose money if your investment provider, bank, credit union, or building society fails. But, if they’re authorised with the Financial Services Compensation Scheme, then up to £85,000 (£170,000 for joint accounts) of your money will be protected. This amount is per provider, so if you had the misfortune that your bank and investment provider both failed at the same time, you could be compensated for up to £170,000 total.
But what about for smaller things? How do you protect your money against inflation or getting hit hard by major market swings?
Can you protect savings against inflation?
Over the years goods and services typically get more expensive, the rate that this moves at is referred to as inflation. The UK government has set a target rate of 2%,[1] although there can be variations in the actual rate on a monthly basis.
This is important to know when it comes to protecting your savings. If your money isn’t growing at the same rate as inflation, then you may not be able to buy as much as you once could. Over a long time period, this can really add up. For example, if you bought something that cost £1,000 in 2009, then if it had increased in line with inflation, you’d have paid £1,351.48 in 2019. [2] Over this period, the rate of inflation averaged at 3.1% a year.[2] However, the highest interest rate that the Bank of England set out since January 2009 was 1.5%, which fell to 0.5% in March that year and hasn’t been higher than 0.75% since.[3] If you were only earning the Bank of England interest rates during this period, then this means your money wouldn’t have kept up with inflation.
By taking a defensive, passive, or low-risk approach to your savings you can reduce some of the risks, but it could also be working against you. There may be some options that allow you to protect your savings against inflation by offering a higher interest rate, although you typically need to lock your money in for a certain length of time. Alternatively, you could have looked into investing to give your money more potential.
Balancing your level of growth
If given the option, most people want their money to grow as much as possible, after all, if you had the opportunity why wouldn’t you? However, high growth typically requires a high level of risk which you may not be comfortable with. But investing isn’t all about high risk, there are plenty of things that you can do to balance out risk against reward.
You could use a robo-provider like Wealthify and choose an investment style to suit your needs. There are five different styles to choose from, ranging from Cautious to Adventurous, and they’re each balanced differently with what they’re invested in. The more adventurous you are, the more high-risk assets – like stocks and shares – you own, while the more cautious styles use low-risk assets, like bonds.
By investing, even when using a more cautious approach, you unlock more potential for your money to grow as your profits won’t be tied to a single rate of interest. For example, when your money is in a savings account, it will only benefit from a single rate of interest – the one set by the bank. But if you have an investment Plan with lots of different types of investments then each one you own will have its own rate of return giving you money more potential.
Reducing risk when investing
If you want to take on the potential of investing but continue to try and protect your money, then there are some strategies that you could use to do just that. One technique that we’ve talked about before is pound cost averaging. In a nutshell, this is just regularly paying into an investment account and buying investments at lots of different prices – by doing this you can smooth out the peaks and troughs on your journey.
Another technique is diversification, which although sounding fancy, simply means buying a lot of different investments from all over the world. But that’s not just buying lots of shares, it’s also making sure you have things like bonds, properties, commodities (like oil or precious metals), and even foreign currency in the mix.
You also may want to consider asset allocation. At Wealthify, our different investment styles are designed to cater for different levels of risk. We do this based on asset allocation. By carefully deciding the makeup of your Plan’s investment type, it’s possible to alter the amount of risk you take when investing.
Don’t put all your eggs in one basket
There are pros and cons for both saving and investing, but it’s generally a good idea not to keep all your money in one place. So, if you’re looking to protect your savings while aiming to make a profit then it could be a good idea to look at saving and investing. Choosing to take this approach means that you can be certain the amount in your savings will stay consistent, while some of your money unlocks the greater potential through investing.
If you’re thinking about investing and want to take advantage of an expert doing all the research, choosing, buying, selling, and managing your investments, then you may want to consider robo-investing. Wealthify makes this entire process as straightforward as possible, from a quick and easy signup process, to clear, jargon-free updates on how your account is performing. If you’ve heard enough and want to get started, use our Create a Plan feature to see how much your savings could grow with an investment style that’s right for you.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
- https://www.bankofengland.co.uk/monetary-policy/inflation
- https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator
- https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate
