plonkee money an english-er's thoughts on personal finance

March 18, 2009

saving and investing in a low interest era

Filed under: savings — Tags: , , — plonkee @ 12:57 pm

When interest rates are as low as they currently are, what does it mean for a savings and investment strategy?

low interest era

Well, it’s worth pointing out that for a long time, a lot of savings accounts have being paying a pitifully low rate of interest. Accounts that have been discontinued for new customers have often paid 1% or less each year, and with inflation running at or around 3% a year they have actually been losing money in real terms.

Now that the Bank of England (and many other central banks) have set very low interest rates, this situation applies to most people who aren’t keen rate tarts.

Of course, the first tactic you can employ to get the best return for your money is to use the best savings accounts that you can. You probably want to take advantage of the best Cash ISA, and then for additional money look at regular savings accounts, fixed savings accounts and the best general savings accounts.

getting a better return

But, as well as finding the best savings product, you should probably reconsider your overall goals. What are you saving money for, and would investing it be better?

As a general rule of thumb, anything that you will need/want to use in the next 5 years should be held in cash. Anything that you will need/want to use after 20 years should be held primarily in investments – preferably a well-diversified mix of equities and bonds. The in-between bit, is kind of a grey area – what to invest in depends on how comfortable you are with risk, the purpose of the money (strict deadline requires more security) and whether you have enough to diversify well.

I’m fairly hardy to risk, and I’ve started to think that outside expenses that I am reasonably certain are going to come up in the next couple of years (plus an emergency fund), I should stick spare money in investments rather than in savings – the sorts of things that I’d like to do aren’t really tied to a specific timeframe. If I invested so that I could move abroad in a few years time, I’m not sure that it matters so much if it takes 7 years, or 10 years, and being tolerant of variability means that a more adventurous path (more equities, less cash) is probably a better match.

Although I’m thinking about this in reaction to the current interest rates, actually it’s true all the time. Cash is for short-term. Investments are for long-term, and in the middle, it depends how flexible you need to be.

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