The Office for National Statistics (ONS) has announced that the savings ratio has fallen to 1.7% during the first quarter of 2017. This is the lowest rate since records began in 1963. Personal unsecured debt (credit card and loans) have also soared to record levels, according to the British Bankers Association.
Why Is this?
For the last year inflation has been increasing and currently stands at 2.9%. For most of last year, wages increased by more than inflation. Average wage increases have now fallen to 2.1%, so prices increases are eating up more of the family budget, leaving less for saving.
Some surveys suggest that historically low interest rates are providing a disincentive to save. Many accounts are paying less than the Bank of England base rate of 0.25%, with only 10% paying more than 1% currently.*
This means that more money can be "saved" by buying consumer goods now, before prices rise, rather than saving in cash based accounts, typically paying less than a third of the current rate of inflation.
While there is some logic in this argument, it is also flawed. Constantly spending all of one's earnings and not saving for the long term simply means that longer term goals will not be achieved or will have to wait till much later.
So what can families facing rising prices, lower real terms wages and near zero interest rates do?
Having access to an adequate emergency cash fund is an essential foundation to sound financial planning. A minimum of 3 to 6 months outgoings should be retained in easy access cash funds so that unplanned events can be managed without recourse to additional borrowing.
Ideally cash should also be available for any planned capital spending, such as home improvements, a car purchase or family celebration. The low interest rate paid on these savings is the price paid for easy access to capital. If it avoids the need to borrow at rates of interest many times higher than the rate paid on savings, it will have earned its keep.
Unplanned and unwelcome events such as ill health or death or loss of home and possessions need to be planned for. This can be achieved through appropriate insurance policies, these should be reviewed regularly to ensure that they remain up to date and are competitively priced.
A review of policies could save money which can then be put towards savings. For example, if you used to smoke but have now given up, you will be eligible for lower premiums. Premiums generally have been falling over recent years, so even non smokers may be able to make some savings following a review.
As well as prices, taxes have also increased over recent years. A tax audit to see if you could save tax by using allowances for income and gains which are tax free (are held within appropriate wrappers such as ISAs); or by the lower taxpayers in the family, can also free up funds for longer term saving. (See Independent Taxation articles Part One and Part Two).
Once all these safeguards are in place, longer term savings can start. These should be invested in assets which may benefit from inflation and so help your money keep its long term spending power. This usually means being able to retain these savings for up to 5 years or longer without needing access to them.
This timeframe is necessary as assets which are likely to beat inflation over the medium to longer term, may go down in value in the short term. By being able to lock your savings away, you can avoid the risk of needing access to your investment at a time when it may have fallen in value.
Assets which tend to keep pace with inflation over the longer term include shares, commercial property and index linked bonds. All carry the risk that they may fall in value and so being able to control when you cash them in is key to successful investing. Before investing some of your assets for the medium to long-term you should always take into account your attitude to risk and capacity for loss.
Is it worth the risk? That is for each person to decide. It is worth bearing in mind that figures produced by Royal London Asset Management showed that £1,000 invested 10 years ago would now be worth £900 if invested in cash but £1,500 if invested in a basket of shares and bonds with UK stock exchange listed companies.
While past performance is not indicative of future returns, to match or exceed rising inflation some investment risk is usually necessary.
Director of Public Policy, LEBC
* Moneyfacts Survey June 2017
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. The Financial Conduct Authority does not regulate tax planning. Tax rates and allowances may change in future.Back to News & Views