Every penny counts at the moment. Amid rising bills, such as energy, food and fuel, alongside higher borrowing costs, it may be tempting to dip into your hard-earned savings and investments to find some much-needed extra cash.
Whether it is for you, friends or family, here is what to consider before raiding your investment pot, plus some alternative courses of action.
The risks of cashing out
It has been a tough year for investors, with the FTSE All Share Index down 6% and the S&P 500 officially in bear market territory after dropping 20% over the past 12 months amid plenty of economic and political uncertainty during 2022.
Selling out of your investments now may be tempting to avoid further losses and free up the money to put towards your own rising costs, but that could damage your investment portfolio in the long-run, hampering your own financial or retirement goals.
Lucy Coutts, investment director at wealth manager JM Finn, warns that if you move out of stocks in a downturn then you won’t do as well as those who remain invested.
“You can’t time the market, but the most important word in investment is time,” she said.
“It is deeply uncomfortable at the moment, it has been an awful year. There is little we can give in terms of comfort except that history shows you will do better if you stay the course.”
The main risk of cashing out during a downturn is that you miss out on a stock market rally.
“Those who do sell to cash in a bear market will miss the recovery as and when it comes,” said Ben Rogers, chartered financial planner at Equilibrium Financial Planning.
“Unfortunately, no-one can predict when this recovery will be.”
The trouble with trying to time the market, according to Albert Soleiman, head of CMC Invest UK, is that you need to get it right twice.
“Once when you decide to sell your investments and again when you decide to put money back to work,” he added.
Review your investments
Rather than cashing out, check where your money is invested and if you can cut costs.
“Although it may be sensible to remain invested, you don’t have to remain invested in the same funds” said Phil Haden, a chartered financial planner at Prosperity Wealth.
“Reviewing your existing holdings ensures they are positioned correctly to maximise growth when the markets eventually improve.”
Review your budget and expenses
Assessing your own expenses and household bills may be a more effective way of releasing much-needed cash instead of using your investments.
“You should understand what your essential income needs are and what you are spending on discretionary expenditure,” said Adam Wing, a financial adviser for UHY Hacker Young.
“You may then be able to see where you may be able to make savings”
Abby Birch, a financial coach at Claro Wellbeing, says it is worth negotiating with your bill providers to reduce your necessary costs where possible
“If insurance renewals are coming up, make sure you shop around for the best deal rather than opting for an auto renewal, Birch said.
She suggests making the most of workplace benefits that could cut the costs of necessities such as childcare or shopping, or you could see if your employer can provide any financial support.
Make sure you are claiming all the benefits you are eligible for by using an online benefits checker such as entitledto.co.uk. Councils also have their own household support funds that may pay for things like energy and water bills for struggling families.
Put in on plastic
A credit card could be a useful alternative for an urgent and essential one-off purchase.
“Anyone with a good credit record can consider borrowing on a credit card with 0% on purchases for a period,” said Sarah Coles, senior personal finance analyst for Hargreaves Lansdown. “Then you can focus on paying the debt off before any interest is due.”
Take a look at our article on the best 0% purchase credit cards for the best deals available.
Make sure you keep up with repayments otherwise you could face high interest charges which would just add to your costs.
“If it’s a sizeable chunk of tens of thousands of pounds, you’ll need to weigh up the downsides of dipping into your investments against the cost of borrowing,” she adds.
“Only you will know whether these costs are better or worse than raiding your investments.”
Raid the Bank of Mum and Dad
Family members may be able to help if you are struggling and could make use of tax allowances for passing on wealth.
HMRC gives everyone a yearly allowance of £3,000 that can be given away tax-free each year without forming part of their estate, therefore reducing any inheritance tax liability. Parents or grandparents could use this allowance to pass money on.
There is also a small gift allowance of up to £250 that can be used each year, although birthday and Christmas presents don’t count.
Additionally, there is a separate wedding or civil partnership allowance of up to £5,000 that can be given to a child or up to £2,500 for grandchildren or £1,000 to anyone else.
“It is always worth having a conversation with family members and seeing if there is an opportunity for someone to use their gifting allowance,” said Rosie Hooper, financial planner at Quilter.
“The next decades are going to see trillions flow between generations, so while not everyone is in the position to receive familial help, some will be.”
The Bank of Mum and Dad will, of course, be facing its own financial pressures and may be concerned about helping with purchases such as for a property when there are concerns about a housing market crash.
The latest English Housing Survey showed the proportion of first-time buyers using a gift or loan from family or friends last year fell to 23% from 34% two years ago.
Taking money out of your investments is still an option if you’ve already exhausted other avenues.
“At the end of the day, money is a tool, not a goal,” said Alena Zavarin, chartered financial planner at Anderson Financial Management.
“In the ideal world you would leave your investments in place until markets recover, but in real life that capital may provide a much-needed relief – even if it comes with a price. The key is to manage withdrawals carefully and only take as much as needed.”