Keeping all money in the bank is a common practice, and if this is something that you do then you’re certainly not the only one. But while it may seem like a good idea thanks to statutory protections, this is not necessarily the case. Inflation can also have an effect, which ought to be taken into account. This article will explore the pros and cons.
Yes: it’s the ultimate safety net
Deposits made to banks in the UK are protected under a scheme known as the Financial Services Compensation Scheme. Deposits made with each banking company (not each bank brand, and some companies own several banks) are protected up to £85,000, meaning that if the bank goes out of business, you’ll get your cash back. Investment vehicles which can rise and fall in value are not protected, meaning that banks are often seen as especially safe.
There are more advantages to using a bank, especially when it comes to quick withdrawals. Bonds, stock portfolios and more often insist that you lose access to your money for a fixed period of time in return for higher returns, or they may take a long time to withdraw simply due to the level of administration required.
No: its value might decline
It’s understandable why someone might consider keeping all of their savings in a bank account. Provided they do not exceed the statutory limit of £85,000 per banking provider, it seems on the face of it that there’s no risk their money will disappear. However, this isn’t strictly true – and has turned out for many people to be wrong.
Inflation eats away at savings which are kept in a bank, and this can cause significant problems for a big saver. If, for example, you manage to save £10,000, and you have it sat in your bank account at the end of the year, that £10,000 can buy you a specific amount of goods and services, depending on the exact price of those items at the time. However, if the price of those items rises, that £10,000 is worth less. And if it rises substantially, the value of your £10,000 will plummet.
To defend against this, many people choose to invest their money in a location which delivers interest, or a return on investment. Given that many bank savings accounts provide pitifully low interest rates, inflation is an almost ever-present threat. As a result, choosing a more adventurous place to invest is wise. Reading this OctaFX broker review can give you an idea of what these alternatives are, while financial advisers can also help. If the alternative is a definite value decline from inflation over at the bank, there’s often no contest.
Keeping your money in the bank may seem on the face of it like a sound and sensible idea given that banks are protected by the Financial Services Compensation Scheme. But with inflation also at work, it quickly becomes difficult to work out which is better. Usually, it’s down to the individual investor – and down to which risk they consider to be worse.