Sometimes, life can take us by surprise – and not in a good way. Whether it’s a leaky pipe, a broken down washing machine or an emergency trip to visit your poorly nan in Skegness, we millennials turn to our short-term savings when we’re in a pickle.
Having a rainy day fund is totes essential; it allows you to quickly access cash when you need it without having to borrow money at an extortionate rate. And savings are also there for you in the good times, helping you to build up money in the short term so you can go travelling like this fabulous lady, or strike out on your own as a creative freelancer (as I did, and you can too if it takes your fancy!)
But what about the long term?
John F Kennedy once said: “Change is the law of life. And those who look only to the past or present are certain to miss the future.”
For me that means having one eye on might happen – marriage, kids, having your own home – and preparing for what will almost certainly happen. That means having elderly parents to look after, getting old and then frankly becoming a bit too shagged out to want to keep working (it will happen…)
It can be pretty far out to think about this stuff. But you don’t have to know for certain what will happen to start making a contingency plan. Sadly, saving money into a bank or building society just won’t cut the mustard if you want something substantial to play with in the future. Interest on savings has dwindled in the last 20 years, with the average rate now standing at just 0.13% according to The Money Charity.
This means that you’re actually losing money in the long term, as rates fail to keep up with an inflation rate that’s likely to hit 3% in the near future. This combination of low interest rates and high inflation means the real value of your cash is being steadily whittled down over time, with only a handful of accounts keeping up with, never mind beating, the Consumer Price Index (CPI) measure of inflation.
Stocks have historically outperformed cash long-term
By contrast, the stock market offers a very real opportunity to beat both cash rates and inflation — as long as you are in it for the long haul. This is the only way you will see out the peaks and troughs of the stock market, with the best chance of ending your investment on a high. For instance, putting £1,000 into a cash ISA when it first launched in 1999 would have earned £204 in interest by today. Investing that same £1,000 in the UK stock market over the same period would have returned £1,663 – 38% more – despite going through the dotcom bust in the early 2000s and the financial crash in 2008, one of the worst stock market downturns in history.
James Rainbow of Schroders UK, which published this information, said: “The data we have provided adds to an existing body of evidence that shows the stock market tends to grow your money far faster than savings accounts over longer timeframes.”
BUT (and that’s a big but) most of us will need a combination of savings to meet our more immediate financial needs and investments to reach our long-standing goals. So it ain’t either/or.
Your strategy will depend on how long you have, and you need to bear in mind that your investments will go up as well as down, you may not get back what you put in and the past is not always a dependable guide to the future. Sounds scary but we’ve gotta say that, because there are zero guarantees when it comes to investing.
If you’re aiming to go travelling or buy a new car, your timeframe is likely to be five years or less. If this is the case, you are better off saving rather than subjecting yourself to the risk of a short-term stock market crash with no time to regain your losses and make returns in a future market upturn.
Invest for the medium to long-term
If you have a medium-term horizon to work with (possibly because you’re saving for your first home over five to ten years), you have enough time to get something back from investing. Longer term, you can afford to take more risk by having a greater investment in equities, which can be a rollercoaster ride but have historically outperformed other asset classes (including cash). This is crucial when you consider the cost of life’s major milestones today.
Ridiculously priced housing, the Instagram benchmark of weddings, the cost of bringing little humans into the world…the amounts you’re saving and investing for the future are your only protection against the total shock upon reaching 30, 40 or even (shudder) 50 and realising you don’t have enough money for what you want in life. And while the later part of your life seems a long way off, the only way you’re going to be able to give up the whole working thing and actually enjoy a happy retirement is by investing NOW. Yes, now.
So while there are no certainties when it comes to the stock market, one thing is for certain — when it comes to long-term prosperity, we’ve got to be in it.