A recent report by Fidelity entitled “Financial Power of Women” highlighted the fact that although many women saved on a regular basis, they were more comfortable putting their money into cash rather than investing in the stock market.
Cash savings are very important, and we should all have a cash buffer…our emergency cash. Ideally this should cover a minimum of three months’ worth of your normal spending. This is so that if you were unable to work and were not earning, you have sufficient funds to last you in the short term.
A healthy cash balance also means that if you have received a divorce settlement which is funding your ongoing spending needs, you wouldn’t need to withdraw funds from your portfolio if the stock market had suffered a slump. Instead you would hold off accessing your fund until the market recovered.
So, a cash saving will always be necessary.
But if you are saving for the long term, it’s unlikely cash is the best option for you.
The return you get on an investment is related to the risk associated with that investment. The greater the risk, the greater the return. Cash in a bank account does not move up and down in relation to the stock market. If you invested £1,000 at the beginning of the year, the £1,000 plus any earned interest will still be there at the end of the year.
The risk associated with this investment is small. Consequently, the return you receive is also small. The return will be below inflation. This means that what you could buy at the beginning for the year for £1,000 will cost more than the £1,000 plus accumulated interest at the end of the year.
Therefore, there is still risk involved. Although you don’t have an investment risk that your funds will drop in value, you do have an inflation risk….your funds aren’t keeping pace with inflation and you are losing purchasing power.
If you need money for a short term security measure this isn’t a big problem. But if you are saving for the long term, over time the amount you are saving is losing value.
Surveys show that fear of losing money is a key barrier for women to investing in the stock market. This is a very valid fear. However, with a well diversified portfolio, over the longer term you would expect a positive return, more than what you could achieve with cash.
Cash may feel safe to you. But compared to the stock market, over time the cash option will return significantly less.
Women live longer than men. Currently one in four 65 year olds live past 90 and one in ten live past 95. The vast majority of people over 90 (seven out of ten) are female.
Women generally live about five years longer than men, and therefore we need more money saved up to cover our spending in these years.
How do you know if you have enough?
If you work with a financial planner they will show you, based on various assumptions, how long your money will last. If you are currently saving on a regular basis, you can see the impact of saving more, and the impact of getting a greater return.
If you do not know whether you have enough, why not apply for a clarity call with me?
We can review where you are now, where you want to get to, and whether you’re on track to achieve this.
Alternatively, please call my office on 020 7117 2628.
Don’t let your uncertainty stand in your way of having sufficient funds for the future.