There is no excuse for keeping your savings in a savings account
By: Jack Walker
Tags: Personal Finance, Apps, Money, Saving, Investing

I feel as though many of the articles I’ve read relating to personal finance should be read alongside a description of survivorship bias — you are more likely to hear stories from people who do well, and less from those who don’t. If I lost my life savings then I am unlikely to want to give the world a play-by-play of how it went down. This leads to a skewed perspective on what works and how easy it should be.

This article is not like those.

I’m writing this because in my hapless last 8 years I have accrued just over £11,500 in opportunity costs. How? By keeping my money in a savings account with a household name bank. 8 years ago I was involved in a car crash; while pulling into a driveway, the driver of the car 3 cars behind decided to overtake the line of traffic and collided with my vehicle, breaking my nose and writing off my car. £10,000 in compensation later, I was diligently following my father’s advice not to spend this on booze and computer parts.

“There are people who know a great deal and are paid large sums of money to invest in the stock market and even they don’t always succeed, why on earth would I think I can do any better?” — Myself, 2019

The buying and selling of individual stocks is a risky business however when you get them together in large numbers they can be tamed. Too tame for the margins that investors deal in but still lively enough to make your savings account look like a suitcase of cash under your bed. For a group of 100+ large companies, it is highly unlikely that the overall worth of their stocks will decrease when you look at timescales in years. This is what ETFs are.

‘ETF’ stands for exchange traded fund — a fund that is traded on the stock exchange. A ‘fund’ is a group of stocks. If you’ve heard the news people refer to FTSE100 or S&P500, this is the aggregate worth of the largest 100 companies in the UK or 500 companies in the USA, respectively. It is usually used as a metric for the health of the economy but you can also buy and sell shares in funds comprising of these companies.

Nerd time over. What does this all mean? Well had I put my £10,000 in an S&P500 fund instead of a bank savings account I would now have around £23,200 given an average yearly interest rate of 8.3%, compared to the actual £11,600 of wasted potential.

You might look at this and think, well hindsight is 20:20. I might as well be telling you to invest in bitcoin or that I should have really bet on Leicester winning the 2015/16 premier league but this advice is more timeless than that. There has never been a stretch of 15 years since 1970 in which an initial investment would have gained less than 47% of its initial value, with the average sitting at around 257%. This is compared to a 2% interest savings account gain of 30.6%.

A “stock market crash” could also be worded as “stock market sale”

If you had invested a sum of money in an S&P 500 fund during summer of 2008, mere months before the stock market crash of 2008/2009, by the same time next year you would have lost a third of the initial value. This is a consideration worth noting when deciding what constitutes your savings vs emergency money. However, even from this terrible starting point, it would take you 5 years for your investment to outperform a savings account as by 2013 you’ll have increased the initial investment by 16.5%. Conversely, if you made an investment in the summer of 2009 in 5 years time your investment would have doubled in worth.

If you want to invest your own money then Trading 212 is an excellent platform to do this on. They don’t charge any fees but do set buy and sell prices slightly above and below the market price. There is a tab on the homepage that will show you their collection of ETFs, for which you can view their index histories. For a super simple guide to setting up an account with Trading 212 (and a link for a free share!) see my super simple setup guide: https://bit.ly/JacksTrading212SetupGuide