The question is not whether the Bank of England will raise interest rates again when it meets early next month; The question is how much. Right now, a 0.75% rise seems to be the consensus forecast from economists and the media.
Either way, things only go one way. By the end of the year, the base rate should be above 4%. By July 2023, it could reach 5.5%.
Does all of this mean that I should aim to hold a larger proportion of my wealth in cash? Not even a little.
The benefits of cash
Now don’t get me wrong – there are some very valid reasons to return some of my money in the bank.
One of them is the idea of having an emergency fund for life’s small (or not-so-small) emergencies. Whether it’s a broken boiler, a car repair or a period of temporary unemployment, having money to cushion the blow makes perfect sense.
Even though I don’t need to use that money, there’s something very comforting about knowing that my account balance won’t change between going to bed one night and waking up the next.
Given that, I would definitely make it a point to seek out the best rate I could get. Staying in an account where the interest rate isn’t competitive doesn’t make sense to me, especially since switching to a new provider doesn’t take a lot of effort.
The silent killer
Beyond having an emergency fund, however, I don’t hold cash. The main reason for this has been one of the main talking points in 2022.
Right now, any money in the bank is (rapidly) eroded by inflation. In case you didn’t know, the latter hit 10.1% in September. In other words, I could have my money in the best instant access savings account on the market (currently 2.5%) and it would still lose a lot of value.
That’s why the vast majority of my wealth is in stocks, including a few that generate truly passive income in the form of dividends. These are the ones that are particularly attractive at the moment.
Why stocks are my priority
Today, many blue chip companies earn far more than the interest rates offered by savings accounts. Insurer Legal and general should yield 8.4%. Telecommunications Titan Vodafone offers 7.9%. Many UK home builders have double digit dividend yields!
Plus, holding everything in a Stocks and Shares ISA ensures that I won’t pay any tax on that income or any profit I make if the shares of the companies I own are worth more when I eventually sell.
Please note that tax treatment depends on each individual’s individual circumstances and may be subject to future change. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and obtaining professional advice before making any investment decision.
No sure thing
Of course, there are certain “costs” that I always have to bear in mind when I continue to buy. As was evident in 2022, stock prices can be volatile. These dividends also cannot be guaranteed, particularly if a company is going through a difficult period commercially.
And that’s precisely why I take a long-term mindset when it comes to investing. I would much rather endure these things now and enjoy the brilliance of compounding later.
I will follow next month’s decision with interest. But moving my money to the perceived “safety” of a cash savings account is not on my to-do list.
The post office Interest rates are rising but I’m still buying stocks for passive income appeared first on The Motley Fool United Kingdom.
Paul Summers has no position in any of the stocks mentioned. The Motley Fool UK recommended Vodafone. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.
Motley Fool United Kingdom 2022