Breaking down emotional barriers to smart saving

Katherine Denham
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A major study reveals what is holding people back from being logical with their money (Source: Getty)

We've all had those times when our emotions interfere with logic.

When it comes to money, we can find ourselves worried – sometime irrationally – about investing, even though keeping your entire savings pot in cash is actually the least logical option.

BlackRock, the largest asset manager in the world, has shown how our emotions can hold us back from taking action with our money, undermining how much we have in the bank.

The fund giant gathered answers from 4,000 people in the UK to find out what they are doing with their savings. And it’s not pretty.

Country of cash hoarders

It found savers were hoarding more than £60bn in cash, which stands to be eroded by £1.5bn this year alone as inflation bites. This could get worse if inflation lingers around the 2017 average of 2.4 per cent, causing an extra £880m to be swallowed into a black hole.

BlackRock’s head of UK retail sales, Jeremy Roberts, points to the emotional barriers that stop us from taking the leap out of cash and into investing. He puts people into three brackets: pinched, paused, and planners.

It’s important to think where you might fit in to ensure your emotions are not hindering your chances of having a better future.

Pinched: a cohort of deer caught in the headlights

The pinched cohort – which make up an estimated 16.5m of the UK population – are the most vulnerable to the rising cost of living. This group of cash hoarders have no intention of moving any money into investments this year.

Pinched savers are often worried their pot of savings is too small to be worth investing. However, with interest rates at record lows, keeping your money in cash will only cause your savings to get smaller, and Roberts says “no pot is too small” to invest.

So just take baby steps by investing regular chunks of money every month. Even contributing £10 a month can have a positive impact on your financial future.

Others choose to keep large amounts in cash because they want to have quick access to their money. While it’s important to set aside some cash for emergencies, there is no need to have thousands of pounds sat loitering in your bank for years.

Another barrier to investing is savers who believe keeping cash is safe. However, Roberts says “your cash is not quite as safe as you think”.

Rising inflation is shrinking the purchasing power of your money, meaning cash is effectively making a loss. For example, if UK savers had invested their £2,270 pot of cash in the FTSE All Share over the past 20 years, it would be worth £8,350 today. But if you left the same pot in cash, then you would have lost more than £1,000 over the same period if inflation was at the current 2.9 per cent.

When compared to investments in companies which can actually benefit from rising prices, cash is clearly not a safe option.

For some, it’s like being a deer in the headlights. These savers are so scared that they end up doing the worst possible thing: nothing, as the fear of losing all of their hard-earned cash stops them from moving into investments.

Of course you should be aware that you have to take risk to get a reward, but you don’t have to pile everything into the FTSE 100. Think about spreading the risk using multi-asset funds to allocate across different regions and asset classes.

Pausers: worried about market volatility

Now it’s onto the pausers, which equate to an extra eight million savers. These people want to stay in cash because they’re worried about market volatility. Investor confidence has slipped recently as fears around the impact of political uncertainty on markets take hold.

While markets will often react to political events, they actually held up far better than many expected after the shock Brexit vote. In fact, market wobbles often present opportunities for investors, because you can tap into certain assets at a bargain price.

Hiring an investment manager to pick stocks and funds on your behalf can also take away some of your worry about investing.

Planners: savvy savers

But it’s not all bad, as there’s three million British savers – known as the planners – who are seriously considering investing some of their cash in the next six months, and therefore have little to no emotional barrier.

The majority of this group are knowledgeable about investing. This proves that a better understanding of markets is a big factor in helping people realise that taking a risk can reward you with returns.

Roberts says we have to get the rest of the nation thinking like this to prevent millions of people from seeing their savings melt away.

If you don’t have good knowledge of investment markets, then paying a financial adviser to help you manage your money is one way to get around this because it can improve your confidence in investing.

While some people are reluctant to pay the fees, the benefits should outweigh the hit to your pocket as an adviser can stop your money from being pummelled by inflation.

The retail boss says the savings landscape is evolving slowly, and more people are recognising the need to divide their savings into segments and allocate some to investments in order to help prepare for the future.

But he stresses that nobody should be complacent. “Each group needs to take a further step to secure a better return for their money.”

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