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Why saving should be back in vogue

Chief Executive, Kevin Gray, on why saving for the future is back in fashion:

In recent decades the easy availability of credit lead to the British people adopting the Pools winner’s old phrase of ‘spend…spend…spend’ as the unofficial motto of the UK. This lead to unsustainable growth in the levels of unsecured personal debt and a national savings ratio that was amongst the lowest of the industrialised countries. Along comes COVID-19 and things have changed slightly. Despite many people having suffered severe hardship as a result of the economic fallout from the virus, statistics show that the majority of Britons who have been able to continue working have actually managed to save during the crisis. This is not surprising, given the fact that working from home has saved on work-related costs such as travel, lunches etc plus there has also been very little opportunity for anyone to spend any money during lockdown.  The pubs and restaurants have been shut, holidays have not happened, and shops have been closed.  The big question is whether saving is back in vogue or whether we will all return to spending like sailors once better times return.  Although I cannot blame anyone for wanting to splash out a bit once social distancing restrictions are raised, there are early indications that more people are determined to try and keep their finances in better shape.  This has got to be good news!

I frequently think about the psychology behind saving and why people want to do it. I have concluded that the main driving force behind saving is the desire to achieve some degree of financial security.  Like squirrels who put aside nuts for the winter, people wish to save in order to protect themselves in case times turn bad. I am firmly of the opinion that those with savings who experienced redundancy or furlough last year, slept much more easily in their beds than those who had no savings to fall back on. Clearly savings also takes place to fund important purchases such as houses, cars, holidays, family weddings etc but the fundamental driver of saving is to protect against rainy days.

Why do people save their hard-earned cash with Banks and Building Societies?  Why don’t they stick their cash in teapots or bury cash tins in the garden like they used to?  The obvious answers are that financial institutions offer greater physical security for customers’ deposits plus they promise to pay interest on them.  Balances of up to £85,000 per person (£170k if in a joint account) in the UK are protected by the Financial Services Compensation Scheme.  Furthermore, savings institutions have to hold capital reserves of sufficient quality and quantity to protect depositors in the event of very severe economic circumstances.  Bath Building Society has one of the strongest capital ratios of any bank or building society in the UK and we have been trusted with looking after our Members’ savings since 1904.  Why do some people prefer to save with building societies rather than banks?  In numerous market surveys conducted on behalf of the Building Societies Association, building societies consistently come out ahead of banks on being trusted.  One of the key strengths of the building society mutual model is that our customers own the business.  Our customers are our Members and are effectively our shareholders.

With the Bank of England base rate being at a record low of 0.1%, and even threatening to go into negative territory, the returns available to savers on monies that they hold in deposit accounts with banks and building societies are struggling to keep pace with inflation never mind provide a real rate of return.  My financial adviser informed me last week that, after fees and contributions, my stock market invested pension fund has grown by approximately 25% over the last 5 years which is significantly better than the return I received in that period on my cash savings.  I recently checked an online house price calculator to be informed that property values had gone up by approximately 17% over that same period.  So why should people bother to save in cash if interest rates are so low and other asset classes potentially provide higher returns?  Deposit accounts may not be an exciting asset class, but they do have advantages.  Cash offer savers a very liquid and accessible form of savings whereas the same is not true of other asset classes.  Cash can pay for the weekly household bills whereas capital tied up in property or stocks and shares is of little use in the short term.  After all, it’s not much use being asset rich and cash poor when you are made redundant, go on short time or are furloughed.  Saving into cash deposits is also low risk whereas the values of stocks and shares and property do fluctuate.

As the Chief Executive of a Building Society that totally depends on people saving with us, you might find it strange that I do not think that everyone should solely invest their wealth in cash deposits.  Good financial advisers will say that cash should be part of a mixed portfolio of savings and investments and I agree with this.  I do however believe that everyone should strive to save an element of their income, no matter how small, and that they should try and build a sufficient reserve of cash to help buffer them from economic downturns.

Part of Bath Building Society’s social purpose is to promote savings as a means of improving the lives and financial security of our Members.  If you think that we can help you with your saving plans, please get in touch.

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