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Savings Accounts Should Have Risk Warnings

Savings accounts are ideal for short-term savings.

The only real risk in the short term of a big sudden loss to your savings is if the UK government is suddenly unable to pay its debts and it decides to swipe them from people who have taken far better care of their finances than the nation has.

(Those things do happen, including in developed countries.)

However, over the long-term, savings accounts are a complete joke.

Savings accounts almost guarantee your wealth will shrink

It all comes down to the hidden cost of inflation.

The bank pays you interest, so you look and feel wealthier. But the savings you put away today are almost guaranteed to be worth 10% to 30% less in 10 years, because prices have risen so fast your savings still can't buy you so much.

That's a loss disguised as a win.

Let's put this another way. Imagine there's no such thing as rising prices – inflation. And instead of paying you interest, the bank charges you a few percent.

The result in that hypothetical situation is exactly the same as what happens now: your real wealth is shrinking.

Savings accounts are high risk over the long run

While they have a lot going for them in the short run, savings accounts are very high risk over the long run because your chances of preserving your wealth are so tiny.

Most savings accounts pay considerably less than 1%, which is easily consumed by rising prices.

If you regularly shop around for the best savings account, you can earn rather more and eliminate most of the effects of inflation. Yet consistently keeping up with inflation is still not a realistic target.

Savings accounts should have risk warnings attached to them and banks should be fined for mis-selling them to people who want to save for a long time.

For all its volatility, you're much more likely to preserve or grow your wealth by investing regularly in the stock market or in P2P lending. The risks in those investments are more short term: you could find you've lost money after one year, but by consistently plodding along with investing regularly you can expect to come out of it just fine.

Note that P2P lending is less volatile than the stock market and considerably less likely to cause you a loss in a given year, although it will probably also grow your wealth more slowly. But at least you can expect it to grow your wealth, not shrink it!

Overall it's a closer alternative to saving than the stock market.

I recommend you read Neil's piece on 2 Rules To Lend Easily And Be Safe From Recessions, which will help show you how to go about lending in a way that is as close to saving as possible.

Compare the latest savings account and P2P interest rates in Safest Peer-to-Peer vs Savings Accounts.

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