Should you invest, or stick with cash?

Investing your savings is the best way to – sensibly – grow your wealth over time.

Although stock markets go down as well as up, the Barclays’ Equity Gilt Study shows that over the last 130 years, the chance of shares beating cash over any 10-year period is 91%.

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Stick with cash, and rising prices means the value of your savings are likely to shrink over time.

Further analysis of the 20 years between 2004 and 2024, found that even with interest payments, cash would have lost 40.5% of its value in real terms, while an investment in a fund with a relatively cautious 60/40 UK equity and gilt split was up by 21.6% in real terms.

But that’s not to say anyone should shun cash: on some occasions, it will, absolutely, be the most appropriate choice.

To help you make the right decisions, here are three scenarios where it makes sense to stick with cash, three where it pays to invest and one that requires a personal judgement call.

When to save in cash…

1) Emergency funds

You don’t really want to sell investments (or borrow) when you need cash in a hurry. Aim to have three to six months of expenses in an instant access account. That way, if you lose your job, get a big dental bill or your boiler dies, the money you need is there.

Just be sure to shop around for the best rate possible to keep the erosive effects of inflation in check.

2) Big spends

If you’ve got any big spends in the next, say, five years, you should also stick with cash. Think holidays, big trips, a wedding, work on your home. Again, it’s important to ensure you’re getting the best rate possible on your savings, but if you don’t need instant access to your cash, it might be worth considering accounts that restrict access for higher rates. Depending on timeframes, you could also explore fixed-rate savings accounts.

Even if you’ve got a major holiday in three years to pay for, you run the risk of needing to sell at the wrong time, if you’re invested.

3) Retirement buffer

If you’re retired and are using pension drawdown, it’s also important to have a healthy cash buffer. A common figure to aim for here is two to three years’ expenses, but cautious investors might feel more comfortable holding a bit more.

When your pension savings are invested it’s important to manage withdrawals carefully, to ensure you don’t run out of money.

While average rates of return may be used to give you an indication of how much you can expect investments to grow, the reality is that returns will differ from one year to the next. A bumper year may be followed by negative returns or vice versa.

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With pensions, the order of investment returns is referred to as “sequencing risk”. And, unfortunately, if your pension’s value drops in the early years of your retirement, it can have a more damaging effect on the sustainability of your pension than falls in later years.

This means that if stock markets are falling and you don’t reduce your income withdrawals, you’ll hasten the depletion of your pot substantially.

However, when you’ve got another pot of cash to turn to, you can stop (or at the very least reduce) withdrawals and take the pressure off your pot while it recovers.

When to invest…

1) Saving for distant goals, like retirement

The longer you have until you need the money, the stronger the argument for investing is.

Here, the amount of time you’re investing is arguably more important than the individual investments you choose. As soon as you start investing, the money your investments make starts working for you, driving even greater returns.

This compounding effect can give your investment a significant boost over time, and it means that the longer you invest, the less money you need to achieve the same goal. You’ve also got the time to ride out any short-term volatility.

That means investing in the stock market is a no-brainer when you’re saving for your retirement. With cash you won’t get the growth you need for such an important goal.

When you’re saving into a pension, you’ll get tax relief on contributions too – boosting your pot even further.

With workplace pensions, you’ll normally be invested in a managed fund with a broad spread of investments including equities and bonds.

2) Saving for kids

Investing involves risk. But even though “risk” and “children” are two words that don’t naturally sit well together, if you’re starting a junior individual savings account (JISA), your kids could miss out if you settle for “safer” cash – especially when you’ve got an 18-year investment horizon.

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Research from the Investment Association (IA) found that if you invested £9,000 (the current ISA allowance for children) into a cash JISA, 18 years ago, it would now be worth just £7,453 in real terms, once inflation has been taken into account.

By contrast, if it was invested in the typical global equity fund, it would be worth £20,802.

Even if it was invested in a lower-risk manner – with money split between equities and bonds, it would still be worth £10,150.

3) When your cash needs are covered

Lots of saving and investing revolves around goals. But many of us will be saving or investing without any particular purpose other than the fact we can, and we should.

If your cash needs are sorted – you’ve got a healthy emergency fund and you’ve set money aside for any known expenses in the near future - it’s worth investing your surplus spare cash, rather than topping up your savings balance.

A stocks and shares ISA provides a good home for this sort of nest egg. You can leave your money to grow, tax-free, but you’ve still access to the money should you need it. There will also be no tax to pay when you make withdrawals.

If you used a general investment account (GIA) to buy shares or funds, dividends could be subject to tax and, potentially, capital gains tax (CGT), when the time comes to sell.

This sort of pot can be a very helpful part of your mid-life financial planning, providing you with access to capital, before you can access your pension. It could also be a useful way of ring-fencing your pension for retirement.

If you don’t end up needing the money before you retire, you’ll have an additional source of tax-free cash. This will come in handy when you need lump sums, or it can be used to top up your retirement income, without increasing your tax bill.

What about saving for a first home?

For younger adults, saving for a house deposit is often the biggest financial challenge.

Historically, the advice was always to save for a property with cash, you don’t want a last-minute stock market wobble to wipe thousands off your deposit.

But with the average first-time buyer putting down a typical deposit of £61,090, according to Finder, rising to £124,688 in London, you’ll want your money to work as hard as possible.

And with first-time buyers getting older – the average age is 33.9 – there’s a more compelling argument to invest, especially if you’re starting young.

But if you do decide to invest, it’s important that you have at least five years before you plan to buy, and invest carefully. Taking excessive risk to drive faster growth could backfire.

It will also be wise to lock in gains and move savings into cash as you get closer to your target.

At the moment, people aged between 18 and 40 can open a lifetime ISA (LISA) to either save for a first home or later life. You can pay in up to £4,000 each year (part of your overall £20,000 ISA allowance) and the government will top it up by 25% (a maximum of £1,000 a year).

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Currently LISAs are available as cash, or stocks and shares accounts and you can use one to buy a property worth up to £450,000.

However, the LISA is set to be replaced in April 2028 with a new ISA designed specifically for first-time buyers.