Setting long term savings goals critical as uncertainty grows

2018 looks set to provide a tough economic challenge as we manage our finances. The last year’s triple whammy of Brexit negotiations, high inflation and long-time ultra-low interest rates don’t appear to be going anywhere anytime soon. And the dip in stocks markets around the world will only add to the sense of uncertainty. 

As we head into the final stretch of this tax year, new research conducted by Willis Owen reflects the malaise. 35 per cent of savers are feeling less confident about the outlook for the economy than they did 12 months ago. This figure has more than doubled over the last two years, from just 17 per cent who felt less confident heading into 2016. 

This uncertainty over the wider economic environment is, inevitably, impacting on how people feel about their personal finances. Over a quarter of people (28 per cent) say they feel worse off this year, a percentage which has continually increased over the last two years (from 20 per cent in 2016). 7 per cent of consumers say they are feeling significantly worse off. This was before global stock markets started to dip.

Furthermore, when asked where people think boosts to their finances may come from over the next 12 months, the answers reinforce the squeeze many are feeling.  28 per cent of people believe the biggest boost to their finances will come from a rise in interest rates – the most commonly cited response – followed by 27 per cent who believe it will come from wage increases at work. 

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Although interest rates rose for the first time in ten years last year to 0.5 per cent, this is still historically extremely low - and well below current inflation at 3 per cent. Interest rates are unlikely to rise to a level high enough to offset the impact of inflation in 2018. It’s a similar story with wage increases. Although wages have experienced a slight uptick, they are still trailing inflation with the latest figures showing growth of 2.4 per cent over the three-month period from September to November, when compared with last year.

What to do amid this unease? An approach all savers should consider is to play a longer game. At a time of high inflation and low interest rates, cash ISAs or traditional savings accounts are unlikely to yield real returns. Although the stock markets are volatile at the moment, investing in the markets may still be a long-term option worth considering. Over the last year, the average cash ISA returned just 0.93 per cent.  In contrast, the average stocks and shares ISA returned growth of 11.75 per cent and despite periods of volatility like the one we are seeing now, the story has been the same since the two savings vehicles were introduced.

Investing in the stock market does come with some risk. However, savers looking to make their money work harder could embrace this by looking at how much risk they are willing to take and choose a strategy which matches the level of risk they’re comfortable with. The concept of risk when it comes to the stock markets is often misunderstood. Given the low returns from other savings vehicles, taking no risk at all in itself poses its own risks to personal finances. 

It is also important to remember that investing in the stock market is a long-term approach. Although stocks and shares ISAs have in the past returned more than cash ISAs over time, there may be some volatility along the way. 

It could be tempting, in the midst of economic uncertainty and with aversion to financial risk widespread, to stick to cash ISAs or savings accounts. But doing so could be counterproductive. Exploring other options, setting long term financial goals and embracing sensible levels of financial risk could help make those goals a reality. 

Jason Chapman is MD at Willis Owen.

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