Interest rates are rising, is it better to save or invest?


Let us addresses a question I have been frequently asked lately: “Is it better to save rather than invest, especially now that interest rates are high?”. One of the very few upsides of rising inflation is that returns on savings accounts are going up. And as they rise, people are shifting more of their cash into fixed-rate savings deals, with interest rates across the market climbing daily. Online banks are offering high-yield savings accounts paying around 5% interest. This is a significant jump from the average 0.29% seen just a year ago.

However, the main disincentive when it comes to savings is that the returns on offer still pale in comparison to the rising cost of living. If inflation persists at its current high rate, the real value of savings - even when held in the top-paying accounts - will be plummeting in real terms. Superficially the headline savings rates have increased, but the gulf between the Consumer Price Index and the Central Bank base rate means the purchasing power of our money is diminishing rapidly. In other words, the ‘cost of cash’ is as high as it has been for decades.

So, to save or to invest? There isn't a one-size-fits-all answer. The best choice depends on an individual's circumstances, time horizons, and risk tolerance. Financial planners often suggest that if you're looking at a time horizon of less than 12 months, keeping your money liquid in cash is sensible - even if it means a return below inflation. However, if you have a long horizon and can tolerate volatility, staying away from cash is advisable. While savings rates may have outpaced some stock returns this year, investing generally beats saving over time.

Investing provides a reasonable opportunity to preserve or even increase your purchasing power, especially during times of high inflation. This is especially true when you diversify across assets that can act as a buffer against inflation. On the flip side, it is challenging to find savings accounts that consistently offer interest rates exceeding inflation. Any cash stored in a savings account with an interest rate below inflation essentially becomes a “losing” account. Your money's value is, over time, being eroded. Investing does not guarantee your wealth will beat inflation, but it does, at the very least, give you a fighting chance.

In conclusion, instead of loading up on cash, individuals should think about using cash appropriately for emergency funds and short-term goals. There is still a pretty big opportunity cost in terms of long-term growth when you choose to invest your money. Even though cash looks attractive now, it has historically done a lousy job of keeping up with inflation!

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Categories: Financial Planning
Oyenike Adetoye

About Nike

Oyenike Adetoye (aka Nike) is an impactful speaker, author and personal finance expert. A Chartered Management Accountant by profession. Nike is the founder and CEO of LifTED Finance, a private financial firm that educates, coaches and supports people on their journey through financial fitness and wealth management.