Storing liquidity in a bank account can be seen as an absolutely safe choice. It is a choice that protects one's money from possible capital losses (e.g. due to fluctuations in the value of securities) or guarantees a liquidity reserve that is always available. However, those who leave their capital entirely in their bank account often fail to take into account certain specific and concrete risks.
- Inflation. The first risk is inflation, which erodes purchasing power. An annual inflation rate of 3% means that an asset of £100,000 loses up to £3,000 in purchasing power in 12 months; in other words, the real (i.e. inflation-adjusted) value of this asset has fallen to £97,000 euros. In short, even not investing is a risk.
- Failure to invest. A risk closely related to the previous one is that of leaving one's savings in non-interest-bearing instruments which, although they protect against the risk of volatility, do not protect against the risk of not achieving one's investment objectives (e.g. the amount needed to guarantee the same standard of living in retirement or to make an important purchase).
- Protection only below a certain threshold. Although this is a risk that only affects certain categories of savers, it should not be forgotten that in the UK the Financial Services Compensation Scheme (FSCS) protects current accounts up to a deposit threshold of £100,000 in the event of bank insolvency.
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Inflation, stagflation and deflation
