Investors are looking at making their cash work for them in the most lucrative way possible. This is part two of this mini series that follows on from our email in July.
Let’s go down the rabbit hole topic of interest % in the bank vs inflation, and how ‘gearing’ your investment can prove to be a great way of maximising your returns and building accumulative wealth.
For only the 4th time in the last 70 years inflation has breached 10%. The Bank of England have hinted that it will continue to hike interest rates in an attempt to bring inflation back to its 2% target to make life more affordable again.
Whilst interest rates are rising, some people may think this is positive in terms of building their ‘pot’ or cash reserves…but not all is as it seems!
The nominal rate of interest describes how much money you will receive for putting your money in a bank. For example – if you put £6000 in an account that is offering you 1.5% interest, you would earn £90 over a year. But if inflation is at 10.1% (which it is at the time of writing this) your cash is actually eroding in value, and after one year your funds after adjusted for inflation would be worth c £5400. The importance here is to realise that there is a large difference between notional interest rates and real interest rates (which account for inflation) and that this can really stack up and make a difference.
It is worth noting that pensions will perform with a similar reaction. Whilst on paper our pensions may grow by 5% this year ( on paper), in reality if we adjust for inflation ( 10.1%) we are making a net loss of c5.1%.
So let’s look at why our clients are “leveraging” their cash in a bid to keep up with fiscal economics. All 3 examples are based on £50,000 and a 1 year forecast.
£50,000 into savings account at 1.5% nominal interest.
Value after 1 year with inflation at 10.1% – c£45,000.
£50,000 in a Pension at 5% nominal interest.
Value after 1 year with inflation at 10.1% – c£47,000.
£50,000 deployed into two residential buy to lets. Each at a value of £100,000
Rental income for both units – £16,200 (8.1% Gross Yield)
Mortgage Interest for both units (based at 3.5%, 75% LTV, Interest Only) – £5250
Capital value increase of 9% – £18,000 ( Based on North East – 2022 Projection)
Value after one year with inflation at 10.1% – c£71,000
c£21,000 increase / 42% increase
What we can say definitively… we are an investment and asset Management specialists. We advise our clients on investments across the UK, assist in purchasing them and manage their investments tightly to ensure their optimum performance.
We are not Financial Advisors, or Tax Specialists but have a very close- knit network of individuals and specialists we work with. As a whole, we provide bespoke investment, financial & wealth planning advice to discuss a balanced and holistic strategy on purchase with your investments.
To discuss your Investment needs, or should you wish to discuss anything in more detail, please contact us on the details at the bottom of this email. And have a look at some inflation beating investment options below.