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We are all living through a tumultuous period as the effects of the global pandemic really begin to have an impact. However one of those effects is not all that bad, people have been saving more money than they were before COVID. So the question now is, should we save or spend?
It is quite understandable people are reticent to spend or invest savings when their job security may remain uncertain, and the old adage of always ensuring a sufficient emergency fund in the bank still rings true. However if you are now sitting on a cash pile in excess of 6 months' normal spending, your money may be under-employed.
In order to prop up economies, governments throughout the world have been printing money to support companies and individuals alike. However that comes at a cost, and that is usually inflation. Already, we are seeing signs of price increases on common goods and services on a global basis.
For example in the UK, the current rate of inflation is 3.2% whereas cash interest rates lag far behind at only 0.1%. In other words, the value of people's cash is being eroded in real terms by 3.1% per year. To illustrate, had you put GBP1,000 in a savings account 10 years ago, its purchasing power today would only be GBP877. Over a similar period, if you had invested GBP1,000 in a relatively conservative portfolio, its value would be GBP1,400 today, even after accounting for inflation.
Most of us know that over the long-term, an investment in equity-based assets like a carefully selected basket of stocks and mutual funds is much more likely to make higher returns than cash, albeit that it comes with a risk premium.
The markets have raced ahead strongly since the panic of the initial COVID outbreak and many investors are worried about a looming correction in stock markets. It is not an unfounded concern which is why we might recommend a 'phased investment strategy' if an investor has excess cash to invest. This means gradually releasing your cash in smaller portions over 12 months or so to greatly reduce the risk of adverse market timing, and average out market prices.
So the advice would be, ensure you have an adequate emergency fund, perhaps pay down some debts which attract high interest, and invest the excess to beat inflation and make your money grow in real terms.