When it comes to saving and growing your money, it’s tempting to simply stash cash into a high interest savings account from familiar brands like Barclays or Santander advertising decent rates.
Especially at the moment with some offering 8% on your savings accounts.
But while scoring 8% interest from your bank may seem appealing upfront, settling for savings accounts over investing means leaving tons of money on the table in the long run.
The best investors in the world will not be using these rates or accounts.
And nor should you if you’re serious about long term gains from your investments.
Here’s why long term investors should steer clear of even the juiciest savings account rates and focus their money on the stock market instead:
Stocks Significantly Outearn Savings Over Time
While savings accounts provide guaranteed returns with no risk to the money you save in them, their interest rates (on average) hover around 1-5%.
These high rates we’re seeing are fairly unprecedented.
Meanwhile, the stock market historically delivers average annual returns of around 7-10% over a long time (which is the timeframe we should be investing for).
Yes, stocks go up and down, but overall they are going to give you better long term returns on your money.
So rather than locking up your money for small slices of interest in a bank, investing puts your savings to work much more effectively.
This is because you have ownership of companies that will grow over time. As they grow, your money grows with them and compounds.
For visual learners, it will look a little something like this:
Your interest compounding in the stock market will eclipse any interest from savings accounts over time.
Another advantage is that stock returns often outpace inflation, enabling your money to maintain and grow its purchasing power over decades.
High inflation erodes the value of cash savings sitting in accounts, unless interest rates also rise in tandem (which doesn’t always happen).
It sounds paradoxical, but investing provides better protection.
Index Funds Minimize Costs and Risks
This all sounds quite simple, and it is.
But we should tread with caution here.
When I say stocks, I definitely don’t mean you should go and put all your money in 2 or 3 companies you like the look of.
Rather, you should put your money in funds.
Funds take your money and invest it into 100+ companies in a certain region (UK, USA, World) or sector (ESG, Tech, Medicine), and therefore spread the risk.
So, opting for these broad index funds helps mitigate risks for long term investors.
They avoid betting on just a few companies and turning your investment portfolio into gambling on the Grand National.
And index funds track market benchmarks passively rather than trying to “beat the market,” a game which most actively managed funds fail at over time.
Their simple strategy results in much lower management fees, maximizing returns passed to investors.
If you’re unsure of where to start, take a look at Trading 212’s ISA page and look at investing in these index funds: MSCI world, Fidelity world, Vanguard S&P500, Vanguard Developing world, HSBC FTSE250
Dollar Cost Averaging Builds Positions Over Time
Rather than anxiously trying to time exactly when to dump a huge lump sum into the market at the “right” price, savvy investors dollar cost average instead.
This means investing bits consistently over months and years which smooths out buying at peaks and troughs.
As a long term investor, temporary dips and manias rarely matter if you maintain a steady investing pace oriented towards the future.
Just contribute every month into your savings account, increase this amount when you get a pay rise or your costs fall and you’ll be laughing in the long run.
Key thing here = invest consistently in index funds, don’t track the progress monthly, leave it alone for 10+ years.
Let Time Work Its Magic
Trying to predict stock market swings is largely futile, as even the experts fail terribly at timing both short term drops and surges.
Human beings simply cannot predict the future. There’s too much going on for us to ever be able to do it.
But what long term investors understand is that over 10, 20 or 30 year periods, stocks reliably rise as businesses grow, earnings increase, and economies expand.
So tune out the day-to-day noise and let your money compound.
Have patience knowing stock gains magnify greatly over enough time thanks to the tailwinds of innovation, population growth, and productivity.
Your future self will thank you immensely.
Conclusion
In summary, locking up savings in high street savings accounts may seem safe (and give you good short term returns in this current climate), but comes at the massive cost of lost wealth compounding you missed out on over decades.
As a long term investor, stocks provide far superior return potential.
So buy and hold diversified funds steadily, ignore interim volatility, and let stock market magic exponentially grow your money over time in ways traditional savings could never match.
And don’t get drawn in by the adverts of the high street banks; like much in life, adverts often aren’t selling you what’s best for you.
The only caveat here is that if you need your money in the short term (the next 2-4 years) then these savings accounts are a good deal.
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Disclaimer: The content on this website is for general information purposes only and should not be considered as financial advice. For personalized financial guidance, consult with a qualified professional. The website owner and contributors are not liable for any actions taken based on the information provided. Use the content at your own discretion.
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