Don’t get me wrong, saving money is great. As good money habits go, it’s the most tried and trusted. It’s warm, it’s cuddly. It’s a Yorkshire grandma.
You remember the Mary Poppins scene with Mr Banks that explains compound interest? “If you invest your tuppence, wisely in the bank, safe and sound, soon that tuppence, safely invested in the bank, will compound.”
Well, that’s still technically true. But after today’s cut in the Bank of England base rate to 0.25 per cent, and the inevitable slide in savings rates, together with the current level of inflation of 0.5 per cent, compounding still means your money is incrementally growing, but very, painfully, slowly.
And pointlessly. Because it is probably LOSING money in real terms, if prices are rising at a faster rate than your interest (although if you’re on a great savings rate, you might still be very marginally winning the game).
Blame the financial crisis of 2008 and Brexit, if you need something to blame for turning Mr Banks into a liar.
Two significant economic shocks, both met with quantitative easing and interest rate cuts to prevent total meltdown. We are now in unprecedented times. And it requires unprecedented changes to financial behaviour from all of us.
A habit that’s hard to break
We Brits are wedded to our little savings accounts. 62 per cent of people hold all of their wealth in cash, according to Selftrade.
This is because humans, always fearing the worst, are naturally risk averse – an emotional approach or “cognitive bias”, as James de Sausmarez, head of Investment Trusts at Henderson Global Investors calls it, which means we “cling to the nominal cash value of our savings, so in recoiling from taking investment risks, we unwittingly suffer the corrosive effect of inflation.”
He continues: “You can be near certain you will lose money over the longer term by putting your savings in cash accounts, as the cost of living, and expectations for living standards will quickly climb out of reach of the paltry returns on cash deposits. It’s costing us billions of pounds every year.”
So what do we do?
There’s still a place for saving. But a smaller one. And you may as well make it an ethical savings account as there is nothing to choose between them anyway.
We need to collectively re-imagine saving as something that we do with a small percentage of our spare cash. The rest, my friends, it’s time to invest. It’s what all this is about after all. Pumping everything we’ve got into the economy. And if you voted to leave the EU, it’s putting your money where your mouth is.
Saving v investing
Investing is not as hard as “they” make it sound. It does involve more risk, because you can lose your capital and the value of investments can go down as well as up, but over the long term, investors have always been quids in over savers.
Five years ago, the FTSE 100 stood at 5,393. Today, it is at 6,693 – a 24 per cent rise over five years. A savings account might have paid a consistent annual rate of 2 per cent over the same period.
More than better returns
And do you know what? Investing is so much more fun. You can choose to invest in companies and sectors that reflect your interests, your passions and your experience. The experience is so much more than sticking £100 a month into a bog standard regular saver.
Investing allows you to connect with what your money is doing. It gives you something more interesting to talk about at parties. It gives you something to be proud of.
… It does also give you a huge headache if you get it wrong. There are way more potential downsides to investing. And if we swing too far towards the stock market and its alternatives, more people could end up with nothing than if they had stayed in their paltry return savings accounts.
The great thing is that now, there are a host of new platforms and apps designed to get newbie investors off the starting blocks with relatively small, savings-like sums of money. They don’t offer stock picking and sustainability, but they do offer transparency, lower costs and a much better user experience.
These include Moneybox, Wealthify, Moneyfarm, Nutmeg and our top responsible money choice because it has a “positive impact portfolio”: EQ Investors.
There are also a range of alternative investments, such as peer-to-peer lending through Zopa and Funding Circle, crowdfunded bonds lending to British businesses such as those from Downing Crowd, and debentures such as these loans to renewable energy projects via Abundance Investments.
These give you a bit more control, but you do need to make sure you are diversified if you DIY invest.
If you want to pick your own stocks and shares, those with social or sustainability themes perform on a par with mainstream funds. The Colombia Threadneedle Social Bond Fund has a lower than average risk profile and invests in enterprises and organisations vetted by Big Issue Invest.
The performance of WHEB Sustainability has been broadly in line with the global index and is medium risk. John Fleetwood of 3D Investing gives this fund 5 out of 5 stars and says: “The level of transparency, communication and understanding of sustainability is exceptional and the fund is therefore one of only a few funds to be awarded a 3D five star ranking.”
Meanwhile, Alliance Trust Sustainable Futures are popular funds that “combine a mixture of ethical approaches including ‘best-of-class’, thematic and exclusion, with a fairly pragmatic approach being adopted,” according to Fleetwood.
2016 has become the year that the nation was forced to change its money habits, for better or worse. A nation of savers is about to become a nation of investors. Will you be one of them?