Q: While I do have a bit of cash invested, with the ups and downs in the market, my pot isn’t looking as healthy as it used to. I also do have some credit card debt that I have been paying off. With interest rates currently rising by quite a lot, would I be better off pumping my money into savings rather than thinking about investing, and sticking to paying off the minimum credit card amount?
A: Thank you for raising a question that I suspect quite a few people will be wondering over at the moment!
High interest rates are generally good news for savers as, in theory, this should translate to higher interest on savings accounts.
However, as far as I can see, at present the best interest rate available on a regular savings account is around 5.25%, whilst the rate of inflation as of September stood at 10.1%. This basically means that even though your money is picking up more interest in the savings account, than it might have done at this time last year, its value in real terms is still being eroded.
Furthermore, high interest rates are always bad news for anyone with any type of debt, be that mortgages, credit cards or bank loans, simply because the rising interest rates mean that you will be paying back increasingly more than you initially borrowed.
Unless the interest rate on your debt is significantly lower than the interest rate on your savings, or your debt is a long-term debt like a mortgage, I would generally recommend paying this off first. The quicker you pay off the debt, the less interest you will end up paying, the net effect of which, if compared with how much interest you might otherwise generate in savings, could be far more favourable for you.
When it comes to savings vs investing, I can completely understand the temptation to focus on cash savings, especially if you have been watching the value of your investments go down. However, unless you are planning on building very short-term savings for an immediate goal, research shows that investing outperforms cash saving over the long term.
There is still a place for a cash pot in your financial planning – this is where your emergency savings fund comes in. Set a limit you are comfortable with for this fund (say three months’ salary) and once you reach this, start thinking about investing. As tempting as higher interest savings account may seem right now, if we are serious about wealth building, we have to make our money work hard for us.
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