How to make the most out of your spare cash

Hanging onto too much money? In an age of increasing economic uncertainty, it’s understandable if you’re keeping as much as you can in your savings accounts. However, you might be surprised to learn your money could lose its value over time.

In this article, we’ve covered a few of the key reasons why you should avoid leaving too much cash in your savings account - and how to stretch your capital even further.  

Why shouldn’t you keep too much money in the bank?

1. Other assets give better long-term returns

Returns on other assets, including equities, often outweigh those from just cash alone.

Even though it’s unlikely that you’ll want to invest for decades, equities are likely to outperform cash even with shorter investment terms. And when it comes to enjoying long-term returns, the timing of any new investment is less important than its time horizon.

2. You might be taxed on interest

Of course, it’s generally advised to keep a rainy-day fund ready for those unexpected expenses.

But holding more than you need could be counterproductive, especially if you’re storing tens of thousands of pounds. The average Brit saves just over £17,000, which could be a sensible emergency fund to work around.

The FSCS protects cash savings up to £85,000. If any of your bank accounts hold more than this, you might eventually need to sacrifice everything over the threshold.

3. Inflation exceeds savings rates

Savings rates often struggle to keep up with - or beat - inflation set by the Bank of England. This means that if you’re keeping your money in an instant access saver, your returns might not match exponential rises in the cost of living.

Even if you found a fixed-rate bonds or a fixed-rate saver with limited access, there’s still a chance that it might not keep up with inflation. If the returns you get from your savings are lower than the rate of inflation, it’s bad news. This means your money is losing value.

The best ways to make your money work for you

• Boost your savings: Choose your account carefully and save prudently. We recommend that you choose a fixed-rate bonds account with a competitive rate.
• Increase your pension: Investing in a pension helps you to increase your cash in a tax-efficient way. You won’t pay income tax on your contribution to an employer’s pension scheme.
• Shares: Also known as equities, these are direct investments in businesses. After setting up an online trading account, you can choose your own shares or hire a professional to do it for you. Patience is key, and you should expect losses at times.
• National Savings and Investments: Government-backed schemes pose no risk to your capital. Look for direct savers, income bonds and premium bonds to get started.
• Investment trusts: Trusts are ‘closed-ended’, which means that only a fixed number of shares are issued initially. Since investment trusts need not distribute all profits, they can keep some in reserves in underperforming years.