Almost nine in 10 of us are now concerned about rising UK inflation rates, with more than half the population planning to cut back on spending to help deal with the cost of living crisis.
The UK rate of inflation hit a 30-year-high in January, with prices rising by 5.5 per cent a year, according to the Office for National Statistics.
The very best rates available this week on cash savings accounts is only 0.75 per cent and as the new tax year approaches, the average cash ISA rate has returned just 0.51 per cent in the last year – a record low according to Moneyfacts.
And yet despite losing money savers in real terms over time, cash remains the most popular way to build savings. Cash accounts are still more appealing than investments that have the potential to match or beat inflation such as shares or property, a study by NFU Mutual has confirmed this week.
Moneyfacts calculates that the average stocks and shares ISA fund, for example, returned 6.92 per cent between February 2021 and February 2022.
But the eroding value of cash is hitting women particularly hard because of their stronger preference for cash over investments than men. Almost a third of women said they preferred cash accounts compared with only 23 per cent of men, the NFU Mutual figures suggest, echoing numerous studies over recent years that show the same reluctance to engage with investments among women.
Men are twice as likely to invest as women.
In fact, a separate study by AJ Bell puts the gender savings gap across all types of savings and investments products, at £1.65 trillion – for a range of reasons.
For starters, women and men are equally likely to have a savings account, the investment platform found, but on average, women put significantly less money in every month – £180 compared with more than £300 for men.
But they are far less likely to engage with investments, citing reasons including a lack of available funds, a lack of understanding, uncertainty over how to begin, concerns over the risk of falling values, and the fear of being ripped off.
Now though, as inflation reaches a 30 year high, that aversion is costing us more money – in a personal financial and economic climate in which women already earn and save less to start with.
“The average cash savings accounts would have lost investors 12 per cent in real terms over the past 10 years, and that is only likely to get worse this year as inflation rises to levels higher than we’ve seen for a long time,” he says Alison Fleet, personal finance specialist at NFU Mutual.
“Investing in property or the stock market has a better potential to keep pace with or beat inflation, but property isn’t a realistic investment for everybody because it often requires a large sum of money in the first place to pay for a deposit.
“You can start investing in the stock market with much less. The key is to make sure you have some cash reserves in place for any shocks, make sure your investments are diversified, and invest for the longer term so you can weather the ups and downs.”
Short-term savings are useful to cover things like unexpected costs and a sudden drop in income, such as redundancy. Financial advisers recommend having between three and six months’ worth of monthly outgoings set aside to cover such eventualities.
But those planning for the medium to long term, for five years or more, the stock market has the potential to give better returns than cash over long time periods, as the Moneyfacts data shows.
If you aren’t sure whether investing is right for you, or how to get started, then talk to a financial adviser, says Fleet.
There is no doubt that investing money is riskier than a savings account. But if you invest, then you can reduce the risk of losing money by spreading it between different kinds of investments, known as “asset classes”. These typically include shares, government and corporate (company) bonds, property, as well as cash.
A diversified portfolio doesn’t guarantee you’ll be protected from losses, notes Fleet. But it can help lower your risk, as the values of different types of assets don’t always move in the same direction. In a diversified portfolio, a fall in the price of one investment has less of an impact overall.
meanwhile, you can improve the returns on your investment by not paying more tax than you need to. You can invest up to £20,000 in an ISA each tax year free for UK Income tax and Capital gains tax.
And don’t forget the potential of your pension. For every £80 you invest HMRC will add another £20. If you pay higher rate tax you can claim back up to an additional £20.