Inflation at its present level is certainly a concern. It continues to dominate the airwaves as we see the impact of supply chain issues and the increase in food and energy prices. You’ve probably noticed that life is getting a lot more expensive nowadays as inflation eats into your disposable income.

Fears of inflation and higher interest rates has also put downward pressure on stock markets throughout 2022 – especially on those stocks that had done well during 2020 and 2021.

During times where markets are pushing negatively, although it can feel comforting to hold cash, you could be holding on to too much cash.

So how do you manage your money – to withstand the spectre of rapidly rising prices?

What is inflation?

Inflation is the rate at which money loses its value over time. Here is the buying power in today’s money if you held £100 in cash from these dates until 2021:

Source: Inflation calculator | Bank of England

Inflation is quite the beast. Whilst cash has a place, in also needs to work for us. Using your money wisely is the best way to control your financial future. That’s why we build financial plans and wealth strategies in the first place.

How much cash should you hold?

Security should be the overriding feeling when retaining funds in cash savings. When inflation is running at the highest point since the 1970s, leaving it alone will simply reduce the value. Interest rates are heading up, but they are not yet close to the levels of inflation.

It makes sense to get ahead of the game by building up your rainy-day savings pot – a cash buffer for unexpected emergencies. We think around three to six months’ worth of essential expenses held as cash to cover emergencies is about right. Although we also work with some clients who like to hold one or two years’ worth of income to feel secure.

Above this, cash is not producing a real return and therefore a long-term strategy should be considered.

Where to hold cash?

Cash rates continue to increase for the first time in years due to the Bank of England making clear their aim of keeping inflation under control. At the time of writing the best level of instant access cash is offered by Yorkshire Building Society for c2-2.5% and they have the expected FSCS guarantee of £85,000, albeit with some limitations on withdrawals.

If you have more cash more than this, then you should start by looking at NS&I. Premium bonds are yielding approximately 2.2%, with the direct saver and the income bond back up to 1.2%. The major benefit of these accounts is the direct link to the treasury which means larger sums can be retained here.

The main decision here is balance. There will need to be some funds held on deposit for security and cover and short term costs. Above this, ensuring funds are not being whittled away by inflation will provide the medium and long term security that you are looking for.

So where does investing come in?

Investing in the stock market has historically often been the best long-term option to help avoid inflation eroding the value of your money.

If your investment grows by 5% and inflation is at 2%, you’ve made 3%. But more importantly, you’ve made a real return. The value of your money has outpaced inflation and is now worth more.

Knowing or deciding when to invest can be a hard decision, but it is one made even harder when market volatility is as high as it has been during 2022.

If you have excess cash, and a time horizon of at least five years, a window might be nearing to invest some of your money.

What’s important though is that you focus on your longer-term goals and appetite for risk, as part of your overall financial plan. To discuss your situation, why not get in touch for a free consultation with one of our financial experts today.