Saving your cash feels safe. You can see the balance, it doesn’t lurch up and down with the markets, and you can reach it whenever you need it. That’s why so many of us keep large sums in savings accounts, sometimes for years.
But cash has its limits. Save too little and it can leave you exposed when your boiler packs up or your hours get cut. Saving too much means your money might lose its buying power year after year, which can hurt your plans for retirement or for passing wealth on to your family.
It’s a fact that for people who invest, their money lasts longer than people that leave it in cash. If you withdraw cash, it can’t be replaced, whereas invested money can grow again
So, how much should you save? There’s no right answer. It depends on your goals, how soon you’ll need the money and how you feel about risk.
Some savers hold far more than they need. Others don’t have enough to cover a bad month. Yet getting the balance right can have a big impact on how secure you feel today and how comfortable your retirement might look in 20 or 30 years’ time. It’s a question many savers ask themselves, especially when interest rates move.
This article looks at the role cash savings can play in your long-term financial plan, what holding too much can cost you and how to work out a sensible amount to put aside each month.
We’ll also share some practical saving tips and explain how Glenrose Financial Planners can help.
What cash does well
Cash does a few jobs better than any other asset…
It gives you instant access. You can withdraw from an easy-access account within a day or so, and its value won’t drop when the markets have a bad week. Investments, on the other hand, can rise and fall, and you might have to sell at a poor moment to raise funds.
It covers emergencies. A leaking roof, a car repair or a gap between jobs can arrive without warning. Having an emergency fund means you can deal with them without selling your investments or borrowing on your credit card.
It suits your short-term goals. If you’ll need the money within five years, for a house deposit, a wedding or an extension, a cash savings account is usually the most sensible home for it. A stock market fall shortly before you need the money would leave little time to recover.
It helps you stay calm. Knowing you have a cash buffer makes it easier to leave your investments alone when the markets wobble. Many people who sell in a panic do so because they fear they’ll need the cash.
It comes with protection. The Financial Services Compensation Scheme (FSCS) protects up to £120,000 per person, per authorised bank or building society, if the provider fails.
In short, cash is a tool for stability and flexibility. It isn’t designed to grow your wealth over decades.
The hidden cost of saving too much cash
The trouble can start when cash stops being your safety net and becomes your main plan.
Inflation eats away at your money. Prices rise over time, so the same money buys less. Say inflation averages 3% a year. After 20 years, you’d need around £90,000 to buy what £50,000 buys today. Interest might soften the blow, but savings rates often lag behind inflation, particularly once tax is taken off.
Tax takes a slice of your interest. Basic-rate taxpayers can earn £1,000 of savings interest tax-free each year through the Personal Savings Allowance. Higher-rate taxpayers get £500, and additional-rate taxpayers get nothing. So, if you held £50,000 in a savings account earning 4%, you’d earn £2,000 of interest. A higher-rate taxpayer would pay 40% tax on £1,500 of it, which comes to £600.
You may also miss out on growth by holding too much cash in savings. Over long periods, a diversified portfolio of shares and bonds has historically beaten cash, although there are no guarantees. Investments carry risk and their value can fall as well as rise. But money you won’t need for ten years or more has time to ride out the dips. Leaving it in cash means giving up that potential.
Even a modest gap can add up. If your investments grew 2% a year faster than your cash savings for 20 years, the difference on £50,000 could run to thousands of pounds.
The gap can widen in your later years. Retirement can last 25 or 30 years. If everything sits in cash, your income will need to stretch over decades of rising costs. Even inflation of 2% could halve what your money can buy over 35 years.
How much cash savings is enough?
A good starting point is to keep three to six months of essential spending in cash savings, preferably in an easy-access account. That emergency buffer should be enough to cover your bills if your income suddenly stopped, such as your mortgage or rent, utilities, food, transport, insurance and any minimum debt repayments. Holidays and meals out don’t count.
So, if your household spending runs to £2,500 a month on essentials, you’ll need £7,500 to cover three months and £15,000 to cover six. That gives you a clear target to plan around.
Some things might push the figure up or down:
- Your job – If you’re self-employed or your income varies, aim for the higher end or beyond.
- Your household – If any dependants rely on one income, you’ll want a bigger buffer.
- Your protection – Limited insurance or income protection means more cash may be sensible.
- Your other assets – If your partner has an income, or you have any investments you could sell without penalty, you may not need to save as much in cash.
Once you stop work, your sums might change. Many retirees hold one to two years’ worth of income in cash. If you draw £20,000 a year from your pension, that means holding between £20,000 and £40,000 in cash. Then, should the markets fall, you can take your income from the cash and give your investments time to recover, rather than selling at a low point.
You should keep money for planned spending separate from your emergency fund. A holiday or new car shouldn’t eat into the money that’s there for a rainy day.
Finally, review your figure once a year, and whenever life changes. A new baby, a change of job or paying off your mortgage can all shift the amount you need to keep in reserve.
Practical tips for balancing cash savings and investments
Once you know your numbers, these five steps can help you get the balance right:
Split your cash into pots
Give each pot a purpose, your emergency fund, your planned spending and everything else. Label them, or open separate accounts, so you can see at a glance what’s spoken for. It will stop you dipping into your safety net for a new sofa. Whatever’s left over is your surplus, and that’s money you can think about spending or investing instead.
Make your cash work harder
Shop around. An easy-access account might suit your emergency fund, while fixed-term accounts often pay more on money you can lock away for a year or two. Cash ISAs shelter any interest you earn from tax. Money market funds are another option. They invest in very short-term loans and can pay rates close to savings accounts. But they don’t carry the same FSCS protection as bank deposits and their value isn’t guaranteed. Watch out for introductory bonus rates that drop after 12 months and put the date in your diary so you can move your money.
Use your allowances
You can put up to £20,000 a year into ISAs, split between cash and stocks and shares as you choose. Surplus cash can also go into your pension, where you’ll receive tax relief on your contributions. Both protect growth from tax, but any unused ISA allowance doesn’t carry over into the next tax year. Married couples and civil partners each have their own allowances, so a couple can shelter up to £40,000 a year in ISAs between them.
Invest surplus cash gradually
If investing a large lump sum makes you nervous, you could invest it in stages over several months. This is called phasing, and it can ease the worry of putting everything in just before a market fall. Bear in mind that if markets rise while you wait, you may miss out. Whichever route you choose, the money should match your timeframe and your attitude to risk.
Review your balances every year
Your cash savings can pile up faster than you think.
Pay rises, bonuses and maturing investments can leave you holding far more in cash than you’d planned. So, check your pots once a year, and again after big life events like retirement, an inheritance or a house move. Move anything above your target to where it can do more for you.
How can Glenrose help?
Your cash savings have a clear job to do. They keep your finances steady, cover surprises and pay for what’s coming up soon. But they work best as one part of a wider financial plan, rather than as your whole plan.
At Glenrose, we help savers and investors in Derby work out how much cash is enough and what to do with the rest. We’ll look at your goals, timeframes and attitude to risk, then build a plan that fits. That might mean setting a target for your emergency fund, using your ISA and pension allowances more tax-efficiently, or structuring your retirement income so your cash reserves and investments work together.
We’re a local, independent firm, so we’ll always recommend what suits you and your goals. All our advisers are based in Derby, so you can talk things through face to face. And we don’t stop once your plan is in place. We’ll review it with you regularly and adjust it as your life changes.
So, if you have a large cash balance and aren’t sure it’s working hard enough, or you’re worried you haven’t put enough aside, we’d be glad to talk it through. Book a consultation with one of our advisers to get started.