Tuesday 8 May 2012

Sweat Your Cash!

Cash forms an important part of the DIY Income Investor Income Pyramid - including current and, 'easy access' accounts (Level 2) and fixed-period savings bonds (Level 3). Cash is a relatively safe way to hold your wealth, given a good rate of interest and government guarantees in case the bank goes bust (in the UK, up to £85k is guaranteed per banking chain). The main risk is then inflation.

However, you need to 'sweat' your cash, to make sure it is working as hard as possible.

This means finding the best interest rates and keeping track of any changes. Unfortunately that means some effort on your part - but the rewards can be substantial.

 Banks (and other savings institutions, like Building Societies) are not there to do you favours - it is a cut-throat business. A majority of the 'best buy' instant-access or term-period accounts carry a bonus which expire within a year. Canny savers need to keep their eye on the ball and know when the bonus is set to drop off - if they don't, the rate can fall significantly, sometimes to nearly nothing.

How big a difference this might make is revealed in an analysis by financial research company Defaqto (reported in This Is Money), which reveals the difference in return on £1,000 over 3 years (from May 2009) in different UK 'easy access' bank accounts:
  • the worst account: £0.24
  • the best account: £71.73
(This is for a saver paying basic rate income tax - see the article for details.)

This staggering difference reveals the cost of inaction (or, let's be blunt, laziness). In fact, according to the research, almost a quarter of easy access accounts pay interest of just 0.10% or less on a £1,000 balance. This means that the bank is making money with your cash, rather than you.

Now, most banks will write to inform you of changes to the interest rate, for example, at the end of your year of introductory bonus. The important thing is to not ignore this but to look for a new home for your cash. And put a reminder to check in your diary.

Do you know how much interest you are earning? If your cash is not sweating, check out the links to the best accounts on the Toolbox page above.

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

1 comment:

  1. I am trying hard to save starting this month and spend less to save more. I guess that's one of me and hubby's goal this year.