Cash Still Trash
Good news: savings rates are way up. That's the end of the good news.
Friend,
Can you remember where you were on 16th December 2021? Or what were you doing, and with whom?
I can barely remember what I had for lunch yesterday. Assuming that we’re all losing our marbles at approximately the same rate, I’m going to guess the answer to the above questions is a resounding “NO.”
Why that date? Because that’s when silly money ended1. Nine days before Christmas 2021, the Bank of England hiked the Bank Rate (the artist formerly known as Base Rate) from an insane 0.10% to a still-loopy 0.25%.
Having had a drop of the hike stuff, reminiscent of historic Friday lunchtimes at The Lamb Tavern2, those wild City types couldn't stop themselves. Once they started imbibing the Bank Rate elixir in a Herculean effort to fight The Cost of Lockdown Crisis, the hiking continued at a record pace, settling at 5.25% just seventeen months later, in August 2023.
Bad news for borrowers. Good news for savers.
And it’s the savers we need to focus on. Finally, this overlooked group are getting a fair deal after over a decade of absolutely dismal cash-saving interest rates.
No, scrub that. What savers are now getting is a slightly less dismal deal.
Yes, as interest rates have increased, so, with a slight lag (!), have cash-saving rates. Rejoice! As of January this year, the average easy-access instant savings rate stood at 2.82%, the highest in 13 years.
Sounds good, right?
Wrong.
Purchasing power is the only metric that matters.
The only reason we hold cash is to be able to spend it later. What you can buy with your money - its purchasing power - is what matters. And inflation is to purchasing power what Sadiq Khan is to London: an unmitigated disaster.
Some quick numbers:
2.82% average easy-access instant savings rate.
8.66% Retail Price Inflation (RPI) per annum, three years to end January 20243.
Assume you had £100,000 in the bank and it had earned 2.82% a year for the last three years (it wouldn’t, but I’m being kind. Also, to keep things simple, I’m ignoring tax on interest. If you allow for this, the following figures are even worse).
After three years, your cash plus interest is £108,701 - nearly nine thousand pounds of “growth.” Nice!
But….
We cannot ignore inflation, which has been clipping along at nearly 9% through that period. To preserve purchasing power, those cash savings must now be £128,295, not £108,701.
The cash has suffered a permanent and irrevocable 15% decline in purchasing power. As we finance boffins are apt to say, this is distinctly sub-optimal.
Cash has its place
We need the folding stuff to fund “lifestyle”. We need cash for those moments when
the right money has to be there
at the right time
for the right reason.
Be it a new car, a memorable holiday, an extension to the family pad, clearing a debt, etc.
A personal example: The Lovely Penelope (TLP) and I have a fixed-rate mortgage that ends in a couple of years. Aeons ago, we set up investments designed to grow and be used to clear some of the debt. As that time approaches, those investments have recently been sold to cash.
The right money has to be there: if we miss two years of investment growth, that's too bad. We don’t have the timescale to weather the market's temporary declines, which come along as regularly as buses.
So, we’ll bite the bullet and accept that our money is losing purchasing power for the next two years. That’s the price you pay for the certainty of cash, of knowing it will be there because it has to be there.
As importantly, it’s also the price I’m willing to pay not to have my knackers on the chopping board: TLP devolves all the money stuff to me, and God forbid I cock it up.
But it’s still trash
So yes, cash savings are not as dismal as they were - they are just slightly less dismal. Cash remains trash. Understand the principle of purchasing power, and your perception of cash's role in your life changes fundamentally.
Furthermore, you will intuit that:
The danger to your long-term wealth is not that crazy place where fortunes go to be lost (the Stock Market).
The real danger is a Lifestyle cost that, thanks to the silent wealth killer called inflation, will typically more than triple in a bog-standard three-decade retirement.
Putting your retirement nest eggs into cash or other low-return assets is a considerable risk to your wealth health.
Make sure you know the real risks that lie ahead. I can help you navigate these. Subtle, eh?
16-12-2021 should be a National Holiday from now on. It was the end of a crazy era of ultra-cheap money, which inflated assets and denied a generation any chance of getting on the property ladder. In time, it will be seen as a monumental moment in our recent history. Probably.
I worked in the City 35 years ago. Friday lunchtimes were carnage. It’s all changed since then: now it happens on a Thursday. #WorkingFromHome #YeahRight #PassTheAsprin
Source: Dimensional Fund Advisors (DFA) Returns Software
In my experience - and likely yours too, Nick - we can't remind clients (or anyone else who will listen) of this fact often enough:
"Purchasing power is the only metric that matters."
Another entertaining read...