In last week’s blog “How safe is the money in my bank deposit account” I looked at the Financial Services Compensation Scheme (FSCS) and how that can help depositors if their bank becomes insolvent.
This blog looks more at the issue of is it a sensible option to leave a large sum of money on deposit.
In that respect regarding the question “Is my money safe in the bank?” the short answer is “yes”….and “no.” Nothing like covering all options is there?
If you deposited £1,000 in your bank deposit account at the beginning of the year then at the end of the year the deposit account would still be at £1,000- excluding any interest you earned.
The bank balance would not have gone up or down dependant on the movement of the stock market.
So in this respect, if you are very cautious and are nervous of investing in the stock market, then putting your money in a bank deposit account looks like a good idea.
But, remember I also said the answer was also “no”. That’s not just because I’m unable to commit to a decision. The fact is that due to inflation, what you could buy for £1,000 at the beginning of the year would actually cost more than £1,000 at the end of the year.
Inflation is therefore eroding the purchasing power of your investment. Although the deposit account hasn’t fallen in value, during a period of inflation, it has actually dropped in purchasing power, and therefore in that respect you have lost money.
To maintain its value the interest you receive would need to at least keep pace with the increase in inflation.
However you must look at the net interest you receive i.e. after tax.
If you receive interest at 2% pa (gross) and you are a 40% tax payer, than after tax the interest you have earned is 1.6%.
If inflation has increased by 3% you have infact lost money.
So although money in your bank deposit account won’t fall in value if the stock market falls, do bear in mind that it will reduce in purchasing power if the net interest (after tax) you receive is less than the increase in inflation.
Do remember to take this into account in your financial planning and do not assume having money in cash deposits is a totally safe option.
If you have cash on deposit and would like to discuss this, or would like to discuss any other issue relating to your investments please call me on 01932 698150.