Why cash in the bank is destroying your future, and what to do about it

Property Investment

High yield passive property investment opportunities you can’t afford to ignore

Property investment – is it the best strategy to create high yielding passive income?

What are the other best investment opportunities available to cash-rich investors today?

In this article, we discuss the four highest yielding passive income investments and compare their pros and cons. You’ll also find out the effect of inflation on your money, and learn why keeping cash in the bank is a sure-fire way to destroy your future.

If you are wondering what is the best passive investment asset for you, in a few minutes, you’ll have all the answers.

Keep your money in the bank and wave goodbye to your future financial freedom

If you’ve saved your money in the bank, you can wave goodbye to financial freedom in the future. In April, UK inflation rose to 2.7%. According to moneysavingexpert.com, the best interest rate available on a UK savings account is 1.5% from Santander. But you only get this on the first £20,000. There is no interest paid on cash held above this limit.

Here’s how your spending power is affected after one year of holding £50,000 in an account like this:

  • You’ll earn interest of £300 (£20,000 x 1.5% + £30,000 x 0%)
  • Your account balance will be £50,300
  • Meanwhile, the effect of inflation means you would need £51,350 to keep the same spending power

By keeping your money in the bank and not investing for high yield, you have effectively lost £1,050 in a single year!

And when you compound this loss, it’s even worse. Let’s say you held that £50,000 in your bank account for 10 years, and the interest rate paid and inflation remained unchanged throughout that time:

  • In 10 years, you would need £65,264.11 to have the same purchasing power as you do today
  • The gross sum in your bank account will have grown to £53,210.82
  • In other words, in real terms, your savings strategy has lost £12,053.29

Would you give someone £50,000 today, knowing you would only get back £37,946.71 tomorrow? Because that is effectively what this savings account is promising.

If you’re a saver and not a borrower – typically people in their late forties and older – you are being hit hardest. The value of your cash savings is being eroded every day you leave them in your bank or building society account.

Too busy to invest?

It’s amazing how many people gift banks such large sums of money because they are too busy to invest. We’re all busy. But see that annual loss of more than £1,000 on savings of £50,000 – how much time would you be willing to give up to keep that money in your pocket and not the banks?

What you need is a high yielding passive income investment. An investment that you can Set and Forget. Spend a few hours putting it in place, and then benefit from inflation-busting income. Here are four of the best passive income investments available today:

1.      Index ETFs

Index ETFs are the ultimate in low-cost stock market funds. They can be traded like ordinary shares on the stock exchange, and are designed to mirror the performance of the underlying index. Buy a FTSE ETF, and you get the same return (after the management fee) as if you had bought all the shares in the FTSE, in the right amounts.

An Index ETF is the ideal Set and Forget stock market investment. You’re diversified across the market, and receive the average dividend (currently around 3.5%), as well as benefiting from any capital growth. You can also sell the ETF shares easily, should you need to.

On the downside, the dividend income is not guaranteed, and if the stock market falls, so will the value of your investment.

2.      High yield shares fund

Some dividend stocks pay very high dividends. Perhaps even 6% or 7% or more. You could invest in these separately or invest in a managed fund, which aims to maximise this income. The fund manager will make the investment decisions, in what is known as an ‘actively managed’ fund. If you don’t need the income, you can reinvest to take advantage of the benefits of compounding.

However, these funds aren’t without their drawbacks. Like Index ETFs, the value of the fund can fall as well as rise. When you want to sell, you could get back less than you invested. The dividends are not guaranteed, either. And the fund manager takes his cut before you get paid. Win, lose or draw, the fund manager’s fee (which averages around 1.5% to 2%) is paid on the value of your fund. Perhaps worst of all is the track record of actively managed funds – 86% of them underperform the benchmark they measure themselves against!

The 6% or 7% income comes at a cost.

3.      Peer-to-peer lending

You may not have heard of peer-to-peer lending. It’s a relatively new concept which allows you to lend to other people, through online lending platforms.

You select the interest rate you want to receive, and the online platform matches you with a borrower willing to pay that interest rate. You can start with sums as low as just a few pounds. So, for example, let’s say you wanted to lend £20,000 at an interest rate of 9%. Perfectly possible. If this sounds too good to be true, consider the disadvantages:

The higher the interest rate paid, the riskier the borrower. Your loan amount is not guaranteed. Higher interest rates come with the very high possibility of the borrower defaulting on your loan. While you must do no more work than fund the loan, the most secure loans are those at the lower rates of interest – generally 4% or 5%. And even then, you have the risk of default.

4.      Property investment

Although investment property has had its ups and downs, residential property values in the UK are less volatile than shares. (When the stock market fell by more than 40% during the Global Financial Crisis, the average house price in the UK fell by only 18%.)

If you invest in a buy-to-let, the average rental yield is around 5.7% in the UK. Of course, you may have to pay investment property management fees. But these are nowhere near the cost of the expensive fees levied by active fund managers on a dividend stock fund.

Also, you get to make money on other people’s money, by taking advantage of the benefits of leveraging in property investment. It could have the effect of increasing your real yield to spectacular levels, as high as 8% or 9% and more.

There are some disadvantages when you invest in buy-to-let property. For example, you are reliant on getting good tenants, and if interest rates rise your net rental income could be negatively affected if you can’t raise rents to compensate. Finally, if you need to sell in a falling market, the time it takes to sell could be several months.

Before you invest, measure the risks of buy-to-let property investment, and you’ll be able to reduce those risks.

Don’t want the risk, but still want great high yield passive income?

All investments come with an element of risk. Some risks are greater than others. But if you want a high yield investment which is truly hands-off, and provides guaranteed income and capital growth, then you should consider an investment in a hotel room.

You won’t benefit from leveraging other people’s money – it’s a cash investment asset – but you will receive income of around 8% per year and a guaranteed amount of capital growth (provided you hold the investment through to maturity). Typically, such investments start at around £50,000 and have a fixed term of five years.

We think they are perfect for the investor who is long on cash, short on time, risk averse, and wants to kick the effects of inflation into touch. If you’d like to know more, contact one of our team today on +44 (0)207 923 6100 .


Manny Esezobor

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Manny Esezobor