The dangers of holding too much cash in a world of stubborn inflation

A cash savings account is a simple way to hold your wealth and generate regular interest. Unlike investments, the value of your savings won’t be affected by stock market fluctuations. Consequently, many people view cash as a safe option.

However, while cash is useful as an emergency fund or to save for expenses such as a holiday or home renovations, there are downsides to consider, especially as the cost of living rises.

Read on to explore the dangers of holding too much cash in a world of stubborn inflation.

Inflation has fallen from the highs it reached in recent years but remains stubborn

Prior to 2020, inflation remained relatively low. It dropped even further at the onset of the pandemic when lockdowns reduced demand for goods and services. However, from 2021, as economies reopened, inflation began rising again.

The sharp increase in energy prices drove exceptionally high inflation through 2022. According to the Office for National Statistics (ONS), the rate reached a peak of 11.1% in October 2022.

At this time, you may have needed to adjust your budget as crucial expenses such as energy, food, and fuel rose.

Fortunately, since 2022, the rate of inflation has fallen steadily.

The ONS reports that in the 12 months to August 2025, inflation was 3.8% – the same as it was the previous month.

Bear in mind that this doesn’t mean the cost of goods and services is falling. Instead, the price rises have slowed and may not be as noticeable as they were in previous years.

However, while inflation has come down, it remains above the Bank of England’s (BoE) target of 2%.

It’s also important to note that ONS figures show inflation fell to 2.6% in the 12 months to March 2025, before creeping back up to 3.8%.

As such, inflation remains stubborn, and it’s important to consider how this might affect your cash savings.

Inflation could erode the value of your cash savings

A cash savings account may appear to be a reliable way to grow your wealth by earning regular interest. However, when you factor in inflation, you might realise that you’re not achieving as much growth as you first thought.

In some cases, your cash savings could actually fall in value in real terms. Here’s how this works.

If you had put £10,000 in a savings account earning 5% interest a year ago, you’d have £10,500. On paper, this means the value of your savings has increased by £500.

However, if inflation is 3%, the same goods and services that cost £10,000 a year ago now cost £10,300.

So, although the nominal value of your savings has increased by £500, the purchasing power – the amount you can buy with your wealth – hasn’t risen as much.

When you calculate your “real interest rate” – the interest rate minus inflation – you’re actually earning 2% growth, not the 5% advertised by your savings account.

The effect on your savings could be even greater if the rate of inflation is higher than your interest rate.

Let’s consider the previous example, but with inflation at 6%.

In this case, your £10,000 cash savings would grow to £10,500.

If inflation is 6%, the same goods and services that cost £10,000 a year ago would now cost £10,600.

This means that, despite the interest you earned, you can’t buy as much as you could before. Therefore, the real-terms value of your wealth has fallen.

It’s important to consider this if you’re holding a significant portion of your wealth in cash. In time, inflation could erode the value of your savings, and you may not achieve the real-terms growth you hoped for.

As a result, you might have to make sacrifices if you’re relying on your savings to fund your lifestyle in retirement or meet other financial goals.

It’s important to maintain a cash emergency fund, but you may benefit from investing surplus funds

Your emergency fund is an important buffer against financial shocks, so it’s wise to keep a portion of your wealth in a cash savings account. The general rule of thumb suggests keeping three to six months’ worth of living expenses to help with unexpected costs or replace income if you lose your job.

However, you may want to consider alternative ways to hold surplus funds.

We can help you weigh up your options. In many cases, we might suggest that you invest this wealth instead. While past performance doesn’t guarantee future returns, investing could be more likely than cash to deliver inflation-beating growth, especially in the long term.

Figures from Schroders compared the performance of cash and large cap stocks between 1926 and 2022.

The results showed that if you invested for one month at any point in that period, you would have beaten inflation 60% of the time. In comparison, cash savings would have grown faster than inflation 59% of the time.

However, if you were to invest for any five-year period between 1926 and 2022, you would beat inflation 77% of the time, while cash would only outstrip inflation 54% of the time.

Over the course of 20 years, the data shows that investing beat inflation 100% of the time, compared with 66% for cash.

So, if you plan to build wealth in the long term, investing may be a more beneficial option than cash. We can support you in building an investment portfolio suited to your goals and attitude to risk.

Get in touch

Our advisers can discuss the most suitable ways to hold and grow your wealth with you.

Please contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2025 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.