"How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case."
Savings Accounts (a false hope)
As of October 2018 the Bank of England has increased the base interest rate for the first time since July 2007. It currently stands at 0.5% at the time of writing (up from 0.25%), whereas in November 2007 the interest rate reached a peak of 5.75% (the highest in the last 17 years). To the delight of news outlets, who have been only too happy to over-exaggerate the benefit this will have to savers and prospective first time buyers. Even a 1% increase would not see me jumping for joy. The reality is far more sombre. I think the best way to explain this is through an example…
If we look at savings accounts in general and if we were to assume that your account received 3% APR (which is significantly more than any high street bank will offer), we can look more closely at how this may affect you.
Let’s also assume you have a £60k savings pot, which as it turns out is exactly the same amount as a 25% deposit for the average UK house price (£240k). Your return on that £60k saving, assuming none of that money is withdrawn, is £1800. Is that a life-changing amount of money? I imagine that if you have £60k worth of savings, that return is peanuts to you.
Buy one Starbucks coffee each weekday morning for an entire year (like so many people do) and you will have wiped out half that interest amount. Now, you may not be a coffee person, or a chocolate bar at lunch type of person, or a magazine type of person, but there will be something in your life that you spend an extraordinary amount of money on which has no significant benefit to your well-being.
Add to that, the cost of goods and services increasing (inflation) and that £1800 starts to look like pocket change. Moreover, as your money sits in a bank, it cannot be invested into other cash generating ventures.
The negatives only increase when you start to put more money into these accounts. Assuming you have £100k in a savings account and the interest rate is still 3%, you will automatically be subject to greater risks. In the event of a financial crisis (like the one in 2008) and the banks go bust again. The FSCS will only protect up to £85k per institution (January 2018). Therefore, from that £100k, you are at risk of losing £15k. Imagine spending 3 years saving up a total of £15k, all for it to disappear? How gutting would that be?
To mitigate the risk you can open several accounts with different institutions, but how many will you need if your savings accumulate to £1m? How about £5m? Even 3 separate bank accounts can be a struggle to manage.
It should be noted that the likelihood of your bank failing is low, very low. Hopefully financial institutions have learned from their previous misfortunes. But hope will not save you from the consequences of it happening again and to rely on it is not a sound investment strategy.
“Hope for the best, plan for the worst”
If your ambition is to earn more money, then saving is one of the least attractive ways of doing so. Despite being less risky in terms of losing money compared to other strategies, the reward is very low. How many of the top 100 richest people generated their wealth from saving? Scratch that, how many of the top 1000? 10,000 even?
Despite where you stand on the spectrum of wealth, the potential to make money from saving is relatively the same. There is no doubt that putting your money in a savings account is an ideal backup-plan in the event that a primary investment strategy fails, and is significantly better than putting your cash under the bed. However, the overall hype surrounding savings accounts is wildly overblown.
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