It is always reassuring to have money in a traditional savings account.
Indeed, it is important to have an emergency fund you can draw on when you need to, and an instant access savings account is ideal for this purpose.
Similarly, you may want to hold any savings you are likely to want to access within five years in an interest-bearing account.
However, beyond these important exceptions, there are two strong reasons why holding too much cash could actually harm progress towards your long-term plans.
Read on to find out more.
1. Inflation will erode the purchasing power of your cash
According to the Office for National Statistics (ONS), the inflation rate for the 12 months to July 2025 was 3.8%. This means it will cost you £10,380 to buy what £10,000 would have bought a year ago.
If the interest you earn on your savings accounts does not keep pace with the rate of inflation, the amount you will be able to buy with that money, often referred to as the “purchasing power”, will decrease over time.
While inflation is clearly nowhere near the peak of 11.1% it reached in 2022, MoneyWeek reports the rate is only projected to start falling to the BoE target of 2% in 2026.
This means that holding a substantial amount of cash could be likely to decrease the purchasing power of your money in the near future. Additionally, external pressures, such as geopolitical tension in the Middle East, might drive inflation up again, meaning the effect on your savings is more pronounced
There is a tendency to treat a savings account as a safe haven for your wealth, as the actual value will not fall. However, there is definitely an element of risk involved if inflation erodes the real-terms value of your savings.
2. Holding too much cash can mean you miss out on potential investment growth
As well as the threat to the purchasing power of your wealth posed by inflation, there is also the important issue of missing out on potential investment growth if you hold too much cash.
As you may be aware, the interest on savings accounts is relatively low. Indeed, a report in the Guardian confirmed that the BoE base rate was below 1% for most of the 14 years from 2008.
While interest rates have risen in the past few years, investing may still offer higher returns over a longer period.
For example, Barclays looked at investing £10,000 in the FTSE All-Share index compared with putting the same amount in simple savings account.
Over a five-year period, the investment in the FTSE index would have grown to around £12,500. Meanwhile, in the same length of time, the total value of the savings account would be below £10,500.
From this example you can see that, although past performance is not a reliable indicator of future returns, keeping too much cash in low-interest savings accounts could mean you miss out on the higher long-term returns you would have enjoyed from investing.
However, you need to ensure your money is invested appropriately for your unique situation and financial aims. For example, you may need to consider:
- The amount of risk you are prepared to accept
- How much of your money you are prepared to lose
- The length of time your money needs to be invested.
You should also ensure that your investment portfolio is suitably diversified. This can help mitigate the risk of turmoil in certain markets and regions, and can potentially help you to enjoy better returns over the long term.
There are occasions when keeping money in savings accounts is the right thing to do
While you should carefully consider the threats posed by holding too much of your wealth in cash, it is important to bear in mind that, in certain circumstances, cash is a more suitable option than investing.
For example, holding a sum of money in an accessible account for emergencies is wise. Your emergency fund gives you valuable peace of mind and prevents you from having to resort to expensive short-term borrowing to cover unexpected financial commitments.
As a rough rule of thumb, your emergency fund should consist of your household income for three to six months. However, you may want to hold more than this if it makes you feel more comfortable, or if you are retired.
It also makes sound financial sense to use savings accounts for any money you will want to access within a five-year time frame. This will help you mitigate the risk of stock market fluctuations reducing the value of your fund and depleting your wealth just before you need it.
When you are using cash, we would recommend you shop around to potentially improve returns, and make use of fixed-term interest rate offers if these are appropriate to your needs.
Get in touch
If you would like to talk about your investment and savings options, then please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
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.