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.

October 22, 2008

the impact of the credit crunch on savings accounts

Filed under: savings — Tags: , — plonkee @ 12:00 pm

Funny things have been happening lately. There hadn’t been a run on a British bank for more than 100 years. Until there was one on Northern Rock last year.

Deposits in savings accounts are insured by the Financial Services Compensation Scheme. Unlike the American equivalent (where it is seldom but occasionally accessed), this has basically never been used for a regular bank. Until Landsbanki collapsed, bringing down it’s UK subsidiary Icesave.

Now I’m not one for keeping vast sums of money in savings accounts mainly because I don’t have vast sums of money. But this turn of events has highlighted nicely that nothing is without risk. Savings accounts are safe, but they are not risk-free. Your deposit is only as safe as the institution guaranteeing it – which might be the FSCS, the bank itself, or the government.

In practice, what does this mean?

If you live in a country with a big economy, there is no need to panic. You are not better off putting your money under your mattress. You will undoubtedly be burgled if you do that.

On the other hand, now is definitely not the time to put your money in an uninsured bank. That would be very silly.

I’d suggest general sensibleness. Stay under the insured limits, spreading money around multiple institutions if necessary. If you’re really nervous, then put your money in Northern Rock, or NS&I or something as they are backed by the government guarantee in full.

Usually at times like this, someone recommends buying gold. Indeed, people have been doing just that, which means that the price of gold is particularly high at the moment. Not entirely sure myself whether that makes it a good idea.

October 1, 2008

the sky is not falling in…

Filed under: savings — Tags: , , , , — plonkee @ 8:55 pm

…or why you shouldn’t be worried about your savings account.

I already know that you’re all nice sensible people, busy savings and investing towards a fun and exciting future. In the wider world I suspect that not everyone has a positive net worth, or even an emergency fund. Which is why I find the vast amounts of discussion over the insurance/compensation scheme for deposits confusing.

Currently, in the UK 100% of the first £35k is covered by insurance. This limit applies per individual, per bank registered with the FSA. Joint accounts are counted as belonging in equal shares to each account holder.

Now, lots of people want this protection to be extended to £50k. I’m not particularly opposed, but I am asking why it’s seemingly so incredibly important to lots of people.

Many people are up to their eyeballs in debt anyway. Aside from possibly a small emergency fund (well under £35k) they should probably be putting their spare cash into paying off what they owe more quickly. In any case, 96% of deposits fall under £35k.

Moreover, if you have more than £35k in a savings account in a bank, whilst you’re clearly doing something right, how hard is it to switch some of that money over to another account in a different bank, if you’re worried about bank failure?  (By the way, the answer is *not very*.)

If, say, you have £40k with HSBC, why not move some to say Kaupthing Edge, an Icelandic bank that’s fully insured, and also has currently the best instant access rate on the market at 6.55%?

The only, very tiny, potential pitfall in the plan is that some banks are owned by the same group, (like Halifax and the  Bank of Scotland) and so even though they have different names, they count as the same bank. This handy guide from will tell which these are.

Despite a couple of high profile takeovers, there are still loads of banks in the UK so you could put away in the region of £3m with full protection. Which is a lot of money.

So, unless I’m missing something, I can’t think of a particular reason why it’s vitally necessary and important to increase the level of protection, other than reassuring a bunch of people who probably don’t even have all that much money saved up anyway.

Let’s not forget that the government / Bank of England / FSA haven’t actually let a bank fail yet anyway.

The sky is not falling in on your savings account.

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