Managing your cash is a key skill. Debt is not allowed in the DIY Income Investor approach, so you need cash (i.e. rather than credit) for day-to-day expenses and for longer-term purchases or one-off costs, for which you will need an appropriately-sized 'emergency fund'.
A further role of cash is as a 'risk-free' income investment (as long as you can keep ahead of inflation) - perhaps while you wait on the sidelines until the financial markets settle down (will they ever?).
If you are holding cash for this reason, the most lucrative places to save is a long-term savings bond - and preferably with a fixed rate, so that you know for certain what return you will get and when you will get your money back. The longest are usually around 5 years but you may need a shorter period to manage your particular cash flow needs.
The best rate available at the moment (mid-October 2012) is offered by the State Bank of India (UK): 4.5% over 5 years.
Now, SBI is relatively new to the UK, so it may be some reassurance to know that (according to its website), "in addition to being the largest commercial bank in India with over 18,000 branches, our Bank has offices in 32 countries with a network of around 160 branches, spanning all the time zones, (...) State Bank of India is the 50th largest bank in the world and the only Indian Bank to feature in the Fortune 500 list. State Bank of India is 59.41% owned by the Government of India, making us a solid investment."
And SBI UK is a UK-regulated bank, meaning that your savings with them benefit from the same level of guarantees as other High Street banks.
Having said that, they don't actually have many High Street offices, so opening an account may involve a little more effort than usual. You can do this by post or by visiting one of the branches: there are very clear instructions on what documentation is required on the website (be aware that postal applications require certified copies of documents - which your existing bank could do).
The DIY Income Investor's team's visit to the quite plush London offices (around the corner from the Bank of England) was painless: we were seen quickly by a perfectly pleasant Indian lady and we filled in the required forms without much difficulty. (Quite why they wanted to know how many dependents we had was obscure - but perhaps there is a cultural dimension to this.) Job done in 20 minutes (a phone call to a postal applicant - stressing, again, the need for certified copies - delayed the process a little).
Then we stepped out into the autumn sunshine and showers, knowing that a slice of risk-free and tax-free income (thanks to an R85) had been put in place for the next five years.
Update 14/11/12: We were just in time - the interest rate on this bond has now been reduced to 4.2% (still the market-leading rate). And a note of caution about the efficiency of the bank: we had to remind them (on their free telephone number) to transfer the money into the bond from the opening 'easy access' account.
I am not a financial adviser 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.
Nice find on this bank. However, I don't see how it is tax free? On the weblink you gave it states 4.5% AER which is before tax.
Yes a bit cryptic, I accept, I have my own team -including a non-working spouse, so all our savings income is tax-free.
I talk about this elsewhere on the blog.