Is leaving cash in the bank a clever idea?
It’s an interesting question and we’re going to look at it in some detail here.
Many people (in the UK) are aware of the Financial Services Compensation Scheme (FCSC) which automatically compensates investors for up to £85,000, should their Bank, Building Society or Credit Union fail. Similar guarantees are offered in other jurisdictions such as Singapore and Australia. With guarantees like those, surely, we’ve got the answer. Keeping money in the Bank is safe, and with those guarantees, leaving cash in the bank is a great idea – or is it?
There are many investors leaving substantial amounts of money in bank accounts in fear of a Global market crash, both on stock markets and property portfolios. Whilst we agree liquidity is definitely wise, leaving large amounts of cash in the bank, long term, earning nothing is not the answer.
It all depends on what you want your money to do for you, what type of investor you are and of course how much you have to invest. Conservative investors want to protect their capital without taking any chances. Leaving money in a Bank may keep the money ‘safe’ but what it won’t do is protect it from the effects of inflation vs interest. Leaving cash in the bank will generate a negative return, unless the interest earned is higher than the rate of inflation, which in the current climate, in fact over the last ten-year period, the reality is it hasn’t!
Irrespective of your risk profile, nobody wants to ‘lose’ money. If you want to make sure that your cash isn’t depreciating, you need to consider the alternatives, at least ones that will ensure you’re at least keeping up with inflation, but ideally those that are outperforming it if you want your wealth to grow.
To illustrate the point in simple, yet absolute terms, take a look at the example below:
In 2011, £4,685,000 would have bought you this 5 bedroomed, 3 bath home in the heart of Mayfair, London. The deposit to acquire that property, based on 75% loan to value, would be just over 1 million pounds.
To buy the same house today, it will cost you in the region of £12,941,000, which represents a massive increase over a ten-year period. The deposit to acquire the same property today would be over 3 million pounds.
Let’s say that instead of buying the house back in 2011, you decided to keep your 1 million capital in the bank. If we base our calculations on a generous global interest rate of 1% and a global inflation rate of 3% (again generous) the ‘real’ rate of return would have been -2%.
Let’s look at what that means for your 1 million pounds, safe in the bank over a ten year period.
You have earned 1% per year so £100,000 in interest.
Inflation at 3% would have eroded your capital to £744,000 over a ten year period
You’re now left with £844,000 (in today’s terms) of what was once 1 million pounds.
When the word ‘real’ is used in the context of returns, etc. (i.e., the ‘real rate of return’) this is usually referring to the 'absolute' rate of return you're expecting with inflation (or, indeed, deflation) taken into account. For example, a predicted 3% return in an expected 2% inflationary environment would be a 1% ‘real’ return. For your money to earn interest in a bank then, the interest rate must always be higher than the inflation rate.
The damage caused by the pandemic means that businesses will be reluctant to deter their customers by price hikes in the foreseeable future, but once confidence begins to return, the expectation is that we will see businesses looking to recoup their losses by raising prices.
Rising inflation is a challenge to savers, or conservative investors, who must, at the very least, aim to beat it, to prevent their money from losing value in ‘real’ terms.
Globally this is a significant challenge. In the UK, for example, the current Bank of England base rate is static at 0.1%, which has a knock-on effect on interest available on current and savings accounts. The inflation rate (again in the UK for demonstration purposes) was down to 0.6% in December 2020. Finding a current and/or savings account (again in the UK) with an interest rate of more than 0.6% is difficult, especially on larger amounts.
The only way to avoid this happening is to invest the money, rather than leave it languishing in a low interest bank account, which in the current climate, is paying little to no interest whatsoever.
Let’s give you a quick example of how Greenpark Platinum can help. By investing 20% of your capital, so £200,000 of your cash in our projects, leaving the remainder in the bank as your safe haven, you will earn a 15% return (which is conservative) over the next 10 years. Your invested cash grows by £300,000 over a ten year period, plus an assumed 1% offered by your bank. That is a £400k return so 4% per annum, beating inflation.
We are renowned globally for connecting our members and partners to high value cases. At Greenpark Platinum, we utilise our extensive knowledge and experience, to deliver unique opportunities to diversify portfolios and generate returns that are not related to organisational performance or stock markets.