Why cash might not be king in a world of high inflation

The origin of the phrase “cash is king” is unknown, but it is said to have been popularised by Pehr G. Gyllenhammar, then CEO of Volvo, in 1988.

The stock market crashed the previous year, generating fears of potentially volatile investments, and encouraging Gyllenhammar to extol the virtues of holding large amounts of cash instead.

Since then, “cash is king” has become part of our vocabulary and, in times of turmoil like the 2008 financial crisis, you usually hear lots of people parroting the phrase. But is it still relevant in the current financial landscape?

It’s true that cash may be less volatile than investing in the stock market and cash savings are simple to manage and easy to access whenever you need them. So, you may think that a savings account is the best place to hold your wealth.

However, that may not be the case, especially during a period of high inflation. That’s because the interest rate on many savings accounts in 2023 is lower than inflation and, in practice, this means that your money may be losing value in real terms.

Read on to learn how inflation affects your savings, what alternatives you can explore instead, and what role cash should play in your financial strategy.

Inflation hit 10.1% in March

When Gyllenhammar said “cash is king” he meant that holding assets in cash form could protect you from the potential losses you would suffer if you put money into the stock market and it experienced a short-term dip. But cash is not immune to losses, and it is important that you consider the effect of inflation.

According to figures from the Office for National Statistics (ONS), inflation hit 10.1% in the year to March 2023. But the savings accounts with the highest interest rates do not come close to this figure. Ultimately, this means that the price of goods and services is growing faster than your money.

Indeed, as of 30 March 2023, Money.co.uk found that the best rate for an instant access savings account was 3.4%.

If you had put £1,000 in a savings account a year ago at this rate, you would have £1,034 now. But, the same £1,000 worth of goods and services you could have bought a year ago now cost £1,101 due to inflation. So, even with the interest, your money is still worth less in real terms.

During a period of high inflation, cash that is sitting in a low-interest savings account is slowly losing its spending power, so it is important to be proactive and find ways to counteract the effects of inflation.

Moving cash into a different savings account may help you get a slightly better rate, but when inflation is at a record high, it is likely that your savings will still lose value in real terms. That’s why cash may not be king, and you could benefit from considering an alternative.

Investing your cash may help you beat inflation

Even in an environment where interest rates are rising, they may still be much lower than the rate of inflation. So, if you have medium- or long-term goals in mind – typically more than five years away – investing your wealth instead of keeping it in cash savings could help you prevent it from losing value.

Historically, returns on investments in the stock market tend to outpace the returns from cash savings.

Figures from Macro Trends show that the S&P 500 stock index showed positive growth for seven out of 10 years between 2013 and 2023, with the highest growth of 29.6% in 2013. This is significant growth compared with the interest you are likely to accrue on a savings account.

Although past performance is not an indicator of future performance, this demonstrates that investing your money may help it grow, even when inflation is high. It gives your wealth the potential to maintain its value in real terms.

You may need to take this into account when deciding how much of your wealth to invest and how much to keep as cash savings.

If you have a lot of cash savings, you may also consider using some to make additional pension contributions. You could benefit from tax relief and your pension fund may be invested, so you could see further growth.

65% of people don’t have enough cash savings to support themselves for three months

Although cash is not necessarily king, and investments may give you more protection from inflation, having an emergency fund you can access instantly gives you a buffer against financial shocks.

Figures from Money.co.uk show that in 2023, 65% of people believe they don’t have enough cash savings to support themselves for three months without borrowing money.

In the event of an unexpected bill, or a short period out of work, having a fund you can access at short notice can help you to maintain your lifestyle.

Keeping an emergency fund can give you peace of mind, which is why striking a balance between cash savings and investments may be an effective way to protect your wealth. Ideally, you should aim to save three to six months of expenses to cover yourself against unforeseen circumstances.

Get in touch

If you would like to explore how you can make your cash work harder for you, please get in touch.

Email hello@fcadvice.co.uk or call 0330 828 4714.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.