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Five reasons to hold cash despite rising inflation

Written by: Paloma Kubiak
UK inflation has hit a three and half year high, which is bad news for savers. But there are still good reasons to hold cash.

UK inflation jumped to 2.3% last month, the highest level since September 2013, spelling more bad news for savers.

Rising inflation erodes the value of savers’ cash, and with interest rates on savings accounts at record lows, there are very few places for people to house their money and earn an inflation-beating return.

Data from Moneyfacts reveals there is in fact just one open-for-all savings account which matches inflation at 2.3%. It comes from Milestone Savings. But as it’s a Sharia-compliant account, the rate is only ‘expected’ rather than guaranteed. Savers also need to tie up their money for five years to get the rate. Plus it comes with a steep £10,000 minimum investment.

While there are other savings accounts available that match or beat inflation, they all come with restrictions or stipulations on eligibility such as the Help to Buy ISA products for first-time buyers, linked regular savings account which may require you to have a current account with the provider, and current accounts where holders must meet minimum funds and direct debits.

It comes as little surprise, therefore, that people are shunning saving altogether.

However, despite the slim pickings for savers, there are still a handful of reasons why holding some cash makes sense.

1) Rainy day or emergency funds

Ideally, everybody should have some money put aside for a rainy day, and while the safety net amount varies according to different experts, it’s vital to have some funds to fall back on.

Tom Adams, head of research at SavingsChampion, said: “You never know when you need to fork out for costly car repairs or your boiler breaks down and taking out loans or credit will only compound the problem further. You need to have accessible money ready for an unplanned event or emergency, so either start building up your rainy day pot regularly or move money around accordingly.”

He says savers should look for the best easy access interest rates available, but cautions that you need to watch out for accounts that limit the number of withdrawals you can make per year as these may not be suitable.

“Cash savings are ideal for your rainy day fund as the money may not sit around for long, certainly not long enough potentially to make a good return from an investment or indeed in some cases end up with less than you put in,” Adams adds.

2) Help you budget and manage cashflow

Budgeting is a great way to make your money go further and to plan for those goals that may seem out of reach. By sticking to a budget and not giving in to those short-term needs, you can plan ahead and ensure there will be money available no matter what life throws at you.

Adams lists regular savings accounts, with interest rates available up to 5% from the likes of First Direct, M&S Bank and Nationwide, to get you in the savings habit. “Each comes with a number of rules to stick to in order to get the rates on offer, which can be just the thing to get you to stick to your longer-term goals,” he says.

3) Get into the savings habit

Putting regular amounts aside gets you into the habit of saving and can get you out of those bad spending habits. By sticking to your savings commitments, you can build up significant sums in cash and these can be put towards major life goals, such as a house, a new car or travelling overseas.

Adams says: “Getting into a good habit early and saving rather than spending means you can look forward to the future and fulfil those plans, which is far more preferable to those short-term urges. Once you have the cash, you have more options and can spread it out through different types of account, to maximise your returns, even tying up some of your funds for a later day.”

4) Physical security

A stark difference between cash savings and investments is that with investments, the value can go up and down so there’s a chance you could get back less than you put in. With cash, you won’t lose your money unless your provider goes bust and even then, your money is protected under the Financial Services Compensation Scheme up to £85,000 per person.

Adams says: “While high inflation would impact on your cash, particularly if your interest rate is not higher than the rate of inflation, you will get that interest, unlike the potentially fluctuating returns of an investment.”

5) Make the money in your current account work for you

Many of us keep money in a current account, so you should be looking to get the best return you can while it’s sat there. As an example, Nationwide Building Society offers up to 5% which is far above what you can currently get from standard savings accounts. But Adams says there are a number of hoops to jump through to get the rates on offer.

“This includes a minimum monthly deposit amount, a number of monthly direct debits set up and even monthly fees in some cases. However, if you stick to the rules, these accounts are great for keeping money that you need to access, though providers do limit you to smaller balances,” he says.

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