Why is investing money better than saving in the bank: High returns explained

You have worked hard to accrue your wealth, so naturally you will want to see your finances flourish and develop. That raises the question: what is the best way to grow your finances?

Many of us are programmed via common wisdom passed through generations to save for a rainy day. Yet, while it’s undoubtedly important to have a solid financial cushion of savings readily available in case of an emergency, typically at least three to six months of essential outgoings, saving all of your money in a bank account can be an own goal in achieving your long-term financial goals.

Disadvantages of Saving Money in Banks

Your bank may feel like a safe and convenient place to protect your savings – and it is, over the short term and up to the limit of the Financial Services Compensation Scheme limit of £85,000,– but the real returns after inflation offered by traditional savings accounts are typically low, at least compared to investing your money instead in other assets such as stocks and bonds, even those selected based on a low risk profile.

Even if you are making a small amount of interest on your savings with your bank, you may still consider that a win. However, if the after tax interest rate is lower than the current rate of inflation, the purchasing power of your money is in fact decreasing. The value of your savings is diminishing.

The major threat that inflation poses to your savings was starkly presented through the cost of living crisis between 2022 and 2024. UK inflation, as per the RPI (retail price index) measurement, was 11.6% in 2022 and 9.7% in 2023. It means £100 in 2024 is approximately equal to £78.74 in 2021, a sharp drop in the value of your savings if they were sat in a zero or low interest account.

The basic principle of investing is if you choose to save excess money you’ve earned for your future, rather than spend it, you should be able to enjoy a return to compensate you for the lack of its use. But if the return is outweighed by inflation, you should question whether the ‘compensation’ is adequate.

This doesn’t take into account the missed ‘opportunity cost’ of neglecting to let your savings work harder by investing in assets which potentially offer a significantly greater return over the longer term.

Advantages of Investments

Having worked hard to earn your money, ensuring your savings at least maintain their value against inflation makes a lot of sense. The shrewdest of savers, however, seek a robust plan to invest their money in assets that in fact see their value grow over time, even against inflation.

Especially during periods when inflation is outpacing earnings and savings account returns, it may be time to seek out other more valuable options to grow your wealth. Every year we are reminded that equities (shares in companies producing goods and services) are far more likely to produce higher returns than cash deposits over the long term even if in the short term, negative stock market returns can produce losses made worse by inflation and take time to recover.  Remember, that if an investment of £100 drops 20% to £80 it needs to grow back by 25% just to return you to the £100 starting point.

History of Investments Performance

The 2023 Equity Gilt Study released by Barclays found that since British stocks have returned 4.5% a year in real terms over the past 50 years, compared to 2.4% for gilts and just 0.7% for cash. If the latter is not depressing enough for cash savers, the same assessment over the most recent decade in fact sees a negative return for cash.

The 2019 edition of the same study reported that an investment kept for five years at any stage has a 76% chance of outperforming cash, which look like favourable odds. However, if you extend the holding period to ten years, the figure climbs up to a dizzying 91%.

The report also found that reinvesting income dividends is crucial to long-term returns. If you had invested £100 in UK stocks at the end of 1945 without reinvesting the dividends, the amount would have been worth £244 in 2019 after inflation.

Ian Cowie, Personal Account columnist for the Sunday Times, says that shareholders “benefit from improvements in efficiency and inventions that occur over time.” Meaning that, as companies innovate and grow, the situation becomes mutually beneficial.

Investment Services of Ascot Lloyd

Investing needs carefully considered advice combined with expertise. Whether you are new to investments or want to re-evaluate your existing portfolio, the Independent Financial Advisers at Ascot Lloyd can help you develop a personal portfolio that reflects your goals.

The higher the return generated by an investment, the closer you will get to meeting your financial goals, but nothing is without risk. Understanding your tolerance for risk is a very important part of the planning process, which your Ascot Lloyd Independent Financial Adviser will help you decipher while determining the best strategy to meet your goals.

Working with Ascot Lloyd, an Independent Financial Adviser will go through your life goals and create a robust financial plan balanced to your needs and circumstances, while an investment manager will help design a portfolio that can meet your long-term objectives.

The value of investments or income from them may go down as well as up. As stocks and shares are valued from second to second, their bid and offer value fluctuates sometimes widely.

For more information on investing your money and the best ways to grow your finances meet your financial goals, click here to book a free callback from our team.