How to strike the right balance
In a low-interest-rate environment, it can be difficult to preserve your wealth using a savings account, let alone make it grow. Yet savings accounts are still essential to a good overall wealth strategy. We explain how you should start thinking about balancing savings and investments, to give yourself the best possible chance of achieving your goals.
Interest rates have been at record lows for an unprecedented length of time in many of the world’s major economies. In the UK, for example, the base rate has been at 0.5 per cent since March 2009, and the Bank of England has pledged not to raise it again until UK unemployment sinks below seven per cent: something that is not expected to happen before 2015. As a result, there are few savings accounts in the developed world that can offer a rate of interest above the local rate of inflation.
Deciding how much of your money you should save and how much you should invest is therefore more important than ever. It depends on many factors, including your age, goals and appetite for risk, but ultimately it boils down to this single question: “How do you intend to use your savings and investments going forward?”
When to save, when to invest
Savings accounts, such as the International Reserve Account or fixed deposits offered by Barclays International Banking, are best used to meet short-term needs up to 5 years.
Reasons to save money rather than invest it could include:
- Taking a dream holiday;
- Putting a deposit on a house; or
- Creating an emergency reserve to cover unforeseen expenses.
Investments, by contrast, are best used to raise money for medium- or long-term goals. They should be regarded as a commitment usually of at least five years.
Reasons to invest money rather than save it could include:
- Supporting your young child through university;
- Buying a second home abroad; or
- Making your retirement more comfortable.
Generally speaking, the more you are prepared to leave your money untouched, the higher the potential returns it could generate. So, in order to work out how much of your wealth you can afford to invest, you first need to work out how much of your wealth you may need to access in the short term. When investing, you always have to bear in mind that, unlike in savings accounts, you can lose money; you hope to get more but you might get back less than you invest.
Building an emergency reserve
As a first step, you should work out how much money would be required to cover your living costs – and those of your family, if you are providing for them – for at least three months. You should then create an emergency reserve, by putting this sum into a savings account such as our International Reserve Account. This will keep the money accessible should you become unable to work or face an unforeseen expense.
Obviously, if you have financial interests in multiple countries, your emergency reserve may need to cover multiple currencies. It all depends on where you expect to incur regular expenses if your income suddenly falls. If, for example, you need to make payments in US dollars, euros or sterling, then you may wish to open an International Reserve Account, which can be denominated in any one of these currencies.
Remember: the money in your emergency reserve is there to cover essential expenses, so it makes sense to forgo the potentially higher returns you could get by, say, investing it in shares or funds, and to focus instead on eliminating the risk of losing it. All investment carries risk; investments can fall in value and you may get back less than you invested. Also, we cannot offer investment advice to you in the United Kingdom
How to start balancing savings and investments
With your emergency reserve in place, you can begin to consider your personal mixture of short- and long-term goals.
If you expect to need access to a particular sum of money within the next three five years – to pay for a holiday, for example, or to put a deposit on a new house – it makes sense to keep that money in a savings account rather than to invest it.
Investments suit a longer horizon of generally five years or more. They represent a higher risk than cash accounts because their value can go down as well as up. However, if you wish to finance a major expenditure in the long term – for example, sending your child to university or buying a second home abroad – then investments could give you a chance of earning higher returns, provided you are prepared to accept the risk of getting back less than you invested.
Research by Barclays and others has shown that, historically, investing for longer than five years has tended to generate greater returns than cash left in a savings account over the same period. However, it is important to remember that past performance is no guarantee of future performance and that, unlike cash, investments can lose some or all of their value over time.
Control your most costly investing instincts
Investments can also suffer big drops, even when they go on to make overall gains, so you need to be comfortable with the risks they involve, and to consider how much anxiety you are prepared to tolerate during the investment journey.
Often, investors who want to take risks with their money in search of higher returns find that, when their investments suffer ups and downs, they cannot resist changing their strategy. Yet Barclays research – again, based on historical data – shows that investors achieved better results when they stuck to one strategy for the long term (although in doing so they had to accept the risk that they might get back less than they invested).
You can find out more about your personal tolerance for risk by taking our free online Financial Personality Assessment.
Savings accounts therefore remain an essential part of investing partly because they can give you the confidence you need to stick to your overall goals. They may not be capable of generating the same returns as investments over the long term, but over the short term they can help cover you in the event of emergency expenses or loss of income – and you don’t have the same risk of losing money.
How Barclays can help you to save and invest
Barclays International Banking offers a number of savings and investment products including the International Reserve Account, which offers flexible access to your money and interest rates that track sterling, the US dollar or the euro; fixed deposits, which enable you to set the length of your investment for a fixed term – ideal if you need a specific amount of money for a specific future expense and are prepared to leave your money untouched until then; and various investment funds and structured products designed to suit different strategies and levels of risk tolerance.
You can talk to our team about our range of savings and investment options by calling +44 (0)20 7574 3212*. Alternatively, if you have a Relationship Manager, they can put you in touch with one of our Investment Advisers, who can help you decide whether your balance of savings and investments is appropriate to your needs, and make recommendations about what types of investment could help you achieve your goals. Please note that if you are in the United Kingdom we cannot advise you on investments.
To arrange to speak to your Relationship Manager, please call us on +44 (0)20 7574 3212*.
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