Dental specialist financial adviser Aaron Prested from Wesleyan Financial Services highlights why saving and investing for the future is important for dentists.
A changing economic landscape
Over the past year, we have seen a reversal in the trend of the last 15 years, with interest rates on offer to savers returning to approximately 4% and above. These rates were familiar to savers throughout the late 1990s and early 2000s.
This has given some dentists the long overdue opportunity to hold money in cash accounts and see a level of return in savings accounts that has for once felt worthwhile. But is this the reality, and if so, how many dentists have actually benefitted from this?
To answer this, we need to look at the wider economic picture beyond pure interest rates and consider the impact on dentists who currently hold, or were holding savings and investments, as we came into the cost-of-living crisis.
Throughout 2022 and most of 2023, we saw an economic picture of high inflation which impacted everything from the cost of heating our homes to filling our cars and buying the weekly supermarket shopping. The average inflation rate for 2022 measured a staggering 9.1%. It then fell slightly in 2023, to an average of 7.5%. The knock-on effect of this inflationary pressure resulted in 14 successive increases to the Bank of England Base rate from late 2021, before settling at the 5.25% in the summer of 2023.
What does this mean for savers and investors?
When we look at the average savings account rate on offer in UK accounts in 2023, it was 3.1%. When compared to rates on offer in the preceding 10 years, this may appear favourable. However, if we compare this to the rise in inflation occurring at the same time, this meant that the average saver was actually making a return relative to inflation of 4.32%.
Therefore, the average dentist with savings in interest-paying accounts in this era has been shrinking the value of their savings rather than growing it in real terms relative to inflation. This problem is further compounded when we consider the trend in the level of savings held in the UK through this period of time.
To illustrate this point, the Bank of England’s own data showed that in May 2023, savers withdrew over £4.6 billion pounds. This was the highest monthly figure since they began collecting data in October 1997.
The overall reality for savers has been somewhat bleak during the cost-of-living crisis. Many people have been eroding their savings to make ends meet. Those who could afford to survive without spending their nest egg were making a heavy los sin real terms relative to inflation.
Why should dentists be thinking about their saving habits now?
To understand this, we should think about what might motivate a dentist to save for their future. Typically, we can break down the rationale for saving into four areas. First, those saving for a rainy day. Some will also be saving for a specific purchase or event, such as a house, a wedding, the trip of a lifetime etc. Others are saving for retirement to supplement their pensions. Lastly, those saving for the future of their children – which may be for university, or again a house deposit.
So why should dentists be revisiting both their saved funds and their savings habits now? To put it simply, the economic cycle is changing again and as we see inflation fall, we expect to see the Bank of England base rates fall as a consequence of this.
Ultimately, this means that banks will reduce the interest rates available to savers. Those dentists saving for the future will need to adjust by making new decisions and plans to ensure that they are holding their savings for their futures in the most efficient and appropriate ways possible.
Potential risks
I have come across a number of clients who feel safe keeping money in their bank account, but in fact as we have already noted, there is a real risk here due to inflation. While there is undeniably always an element of capital at risk when investing, I would always ask my clients: are you willing to not invest, knowing that by holding money in your bank account, its value is currently being deflated?
The decrease we have seen in the habit of saving for the future across the population, has for many, been a necessary aspect of surviving the cost of living crisis.
However, we know from the past that the economy has up and down cycles. It is inevitable that the good times will at some point return, as will the bad times, making it important to try to build up a buffer of capital for the future.
I would urge my clients to consider the fact that cash interest rates have typically run behind inflation for the last 15 years. For the chance of an inflation beating return on capital, it may be a good idea to consider investment choices.
Expert Guidance
I have been a specialist financial adviser for more than 10 years now and I am fully aware of just how busy the schedule of the average dentist is. Taking time out for financial planning after a long day caring for patients may be viewed by some as a burdensome task that could all too easily be postponed for another day.
This is where the support and guidance of a dental specialist financial adviser can be extremely helpful. We understand dentistry – the career progression of a dentist and their income patterns. During a financial review, we look at the client’s full situation and then help to put them in an informed position regarding their options. This is based on their individual circumstances and what they wish to achieve. We then help to form a plan that is right for them and that will make the most out of their hard-earned income.
If you would like help and support on savings and investments, you can speak to a specialist financial adviser as part of a no-obligation financial review at Wesleyan Financial Services by visiting https://www.wesleyan.co.uk/financial-advice/appointment or by calling 0800 316 3784.
