• Savings rates are the highest they have been for some time, but still aren’t keeping pace with inflation.
  • Shares have had a better long-term track record of outpacing inflation than cash or bonds, but bonds can help to balance some of the risks.
  • That’s why a balanced portfolio may help you to achieve long-term investment success.


After many years of low rates, savings have made a comeback recently as the Bank of England has raised interest rates from 0.1% in December 2021 to 5.25% today1.

The Bank of England held interest rates at 5.25% for the second month in a row this week, but signalled that Bank rate may stay higher for longer as it continues to battle sticky inflation.

Cash savings rates are close to their best levels in many years, with easy-access accounts at around 5.25% and fixed-rate accounts around 6% in some cases2. However, savings rates have ticked down more recently as markets anticipate that interest rates may be near their peak – even if they are unlikely to come down any time soon.

It’s also worth remembering that inflation, which was at 6.7% in the 12 months to September3, is still above the best savings rates on the market. This means that the spending power of your cash is reducing over time.

This is one of the reasons why it can be worth considering investing in the stock market, if you are comfortable with the risks. Historically, shares have delivered higher returns than cash over the long term to compensate for the greater risk of losses in the short term, as we explore below.

Here we look at some of the key reasons to consider investing alongside your savings to meet your long-term financial goals.

Maintaining an emergency cash fund

First thing’s first: everyone needs some emergency cash.  At Vanguard, we suggest maintaining emergency savings to give you peace of mind and help you avoid taking out short-term, high-cost debt. For one-off expenses, one rule of thumb is to keep the greater of £2,000 or half a month’s expenses in a bank account.

We also suggest having three to six months’ worth of outgoings put aside in case of an income shock – if you or your partner are made redundant, for example. Once this shock absorber is in place, you can look at other ways to make your savings work for you.

The limitations of cash

Beyond your emergency savings, it is worth acknowledging the dangers of having too much of your savings in cash. The best savings rates on the market tend to require you to lock in your money for a certain period of time or place limits on your withdrawals. And while the Bank of England has signalled that interest rates are likely to remain higher for longer, there is no guarantee that savings rates will remain as high as they are now as markets start to anticipate lower rates in the medium term.

The chart below shows how returns from cash, once adjusted for inflation, are still negative, meaning cash held in these accounts is effectively devaluing. The chart uses a bank rate know as Libor to represent savings rates – this is the rate at which banks lend to each other in the wholesale markets and is a good proxy for standard savings rates. 

Returns from £10,000 in cash, before and after the effects of inflation

Past performance is not a reliable indicator of future results.

Notes: Cash returns represented by the Intercontinental Exchange (ICE) Libor GBP 3-month benchmark; inflation by the UK Retail Price Index.

Source: Factset, Vanguard calculations based on period 31 December 1998 to 30 September 2023.

Shares and bonds as alternatives to cash

Over the past 121 years, shares and bonds have had a better track record than cash when it comes to outpacing inflation. As the table below shows, average annual real (after inflation) returns for UK shares since 1901 have been more than 5% and bonds have returned nearly 1.5%, but cash has only delivered 0.87%.

With shares, of course, the value of your investment will rise and fall – sometimes significantly – and there is a risk that you will get back less than you invest.  Over the long term, however, investors have been compensated for this additional risk with better inflation-adjusted returns.

Holding some bonds in your portfolio can also help to offset some of the short-term swings in share prices. Returns from bonds have tended to be lower than from shares over time, but prices and income have tended to be more stable.

Long-term returns from cash, bonds and shares

Average annual returns 1901-2022


Nominal* (before inflation)

Real* (inflation adjusted)










Past performance is not a reliable indicator of future results.

Notes: *Nominal value is the return before adjustment for inflation; real value includes the effect of inflation. Returns are in pounds sterling with dividends and income reinvested. **UK Treasury bills are used as a proxy for cash.

Source: Vanguard using Dimson-Marsh-Staunton global returns data from Morningstar. Data covers the period from 31 December 1900 – 31 December 2022. Returns are in local currency.


It can be particularly tempting to stay in cash – or to invest less in shares – when you’re feeling nervous about the markets. However, long periods out of the market can increase your chances of underperforming.

This is because it is notoriously difficult to time the markets successfully. If you decide to buy back into shares when the outlook is brighter, the chances are that share prices will have already moved higher and you will have reduced your potential returns by being out of the market.

Are money-market funds an option?

Money-market funds are lower-risk investments that aim to provide slightly better returns than cash over time. As interest rates have increased, the yield on these funds (which shows the income as a proportion of the price) has become more appealing to investors.

Money-market funds can be useful for holding investments for the short term, for example when you are deciding where to invest. The funds invest in short-term loans that pay the holder interest. They are usually bought from governments and banks with strong balance sheets and credit ratings, to reduce the risk of losing money. As with any investment, however, the value of a money-market fund can go down as well as up.

While the yield on a money-market fund may not always match best-buy savings accounts, which tend to be short-term deals that can be pulled quickly, the funds aim to provide returns that are comparable with cash over time. With a money-market fund, you also get an investment that is diversified across short-term loans from different institutions, rather than holding cash at just one bank.

The Vanguard Sterling Short-Term Money Market Fund had a yield to maturity of 5.08% as at 27 October 2023. This takes the yield of all the fund’s existing investments and divides it by the current fund price. You can find more information on money-market funds here.

Long-term perspective

Markets are likely to remain volatile in the short-term as interest-rate hikes continue to fully work their way through to the economy. But investors can position themselves for long-term growth by building a balanced portfolio spread across global shares and bonds, which has historically been the best way to outpace inflation over the long term.


Source: Bank of England, Interest rates and Bank Rate.

Source: Moneyfacts as at 1 November 2023, The best UK savings rates this week.

Source: Office for National Statistics. Consumer price inflation, UK: September 2023.


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Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results. Performance may be calculated in a currency that differs from the base currency of the fund. As a result, returns may decrease or increase due to currency fluctuations.

An investment in a money market fund is not a guaranteed investment. An investment in a money market fund is different from an investment in deposits, as the amount invested in a money market fund is capable of fluctuation. Money market funds do not rely on external support for guaranteeing the liquidity of the money market fund or stabilising the Net Asset Value per share. The risk of loss of the amount invested shall be borne by the investor.

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This document is designed for use by, and is directed only at persons resident in the UK.

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