Thursday 6 September 2012

Pennies From Heaven

For me, there is always something magical about interest on savings. You don't do anything more than give a bank a wad of cash (usually electronically, in my case); it goes quiet for a while and then out trickles some interest, which together with other rivulets of cash feeds a growing river of income. (At least that is the theory.)

But, as in the film Neverending Story the approaching wave of darkness - The Nothing - threatens to destroy this magical world of interest...

And The Nothing is inflation (in my mind, at least) - eating away at our accumulated wealth.

So DIY Income Investor Rule No. 1 for cash savings is: find the best interest rate you can - hopefully more than the rate of inflation. Usually you get more the longer term you commit your money to.

Rule No. 2 is only choose fixed-rate accounts. You can't really trust variable-rate deals - the magical banks can make interest disappear as well.

Rule No. 3 is make sure your money is safe - but that is fairly easy in the UK, as most bank accounts are guaranteed by a government (either the UK itself or another government - for example ING is guaranteed by the Dutch government).

Rule No. 4 is avoid paying tax on the interest, if possible - for example, transferring the account to a spouse that has no income tax liabilities. (I suggest you invest your full ISA allowance in a Stocks & Shares ISA.)

Finally, Rule No. 5 is keep liquid - don't tie up money that you might need in hurry: keep an emergency fund in an Easy Access account and some back-up cash in short-term savings bonds.

Let the Magic commence

Savings rates and deals change rapidly: the Tools page above will take you to some comparison sites that will inform you about the most magical of the savings accounts, including

However, the disappointing fact for savers is that rates have fallen. The highest rates available at the moment include:
  • 4.5% available from Bank of India (5-year fixed-rate) - although you need to open the account in a branch or by post (which is a bit complicated)
  • 4% available from the Halifax (5-year fixed-rate) 
(A 4.6% is potentially available over 5 years from the Bank of London and the Middle East but this is not guaranteed.)

By contrast, all my existing cash bonds have higher rates.

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.

No comments:

Post a Comment