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.

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.

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 moneysavingexpert.com 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.

But, actually at the moment, I’m most grateful for my emergency fund. I had no problems getting £300 to pay for a new door, and I’ve actually got myself a little Acer Aspire One so that I can blog and be more mobile. I should be getting a replacement laptop and camera from the insurance people, but I’ve got a few other things that need to be done promptly so I need access to a basic computer. Without my emergency fund, I would have been quite scuppered. As it is, the only problem really at the moment has been the hassle - I had to take most of the day off to sort stuff out.

Has anyone else had to access their emergency fund? I don’t know whether you’d consider my new little laptop and emergency, but the door definitely felt like one to me - it’s quite difficult to leave the house when there’s a big hole in the door.

how much did I save?

Also, I actually didn’t find as many savings as I’d hoped for. I can switch my mobile phone provider and save about £2.50 a month. I can also switch my home phone/broadband provider and save about £12.50 a month, for a grand total of £15 a month in savings. Not a great deal of money

All this assumes of course that I’m not changing the standard of living that I’m enjoying. I’m not cutting back, I simply want to get the same things cheaper. I’ve done it before (I try to do it every year) so the opportunities to save money get less and less.

what shall I do with the money?

£15 a month, is still good money. I could put add it into my investment pot, where over time, it will compound to an inflation adjusted (i.e. in todays money) £17k, giving me an extra £710 a year in retirement income. Which still isn’t an awful lot of money, but would definitely pay for an extra holiday.

Alternatively, I could add it to the amount that I give to charity, which definitely needs to increase. I don’t give nearly as much money as I feel that I should, but I’m often selfish, and increasing my charitable donations doesn’t occur to me. £15 buys a mosquito net preventing the spread of malaria, or pays for 250 school dinners, or does any number of wonderful things via Oxfam (my number 1 charity choice).

What’s important is that I make a decision about where to put this money, and don’t just fritter it away. There’s no point in making savings in one area just to accidentally lose them in another.

If you’ve found savings by cutting back on your major bills, what will you do with this money? And, what should I do with mine?

When you put money into an emergency fund, it needs to be an accessible place, so it doesn’t even compound that much. You squirrel away a whole load of money, at least the equivalent of several months expenses and plan never to spend it. Where’s the fun in that? There isn’t any fun in it, that’s where.

Thing is, if you need an emergency fund, it’s because you are a grown up. Sure, being a grown up means having fun, but it also means accepting that sometimes you need to be sensible, and then it means getting on and doing it. No fun, no messing and no spoonful of sugar.

On the bright side, once the emergency fund is in place, you don’t have to think about it too much, it’ll help you sleep at night, and you can get on with playing on your Wii, or whatever else it is that grown ups do.

The allowed amounts are up to £3000 in a mini cash ISA, up to £4000 in a mini stocks and shares ISA, and up to £7000 in a maxi ISA (basically stocks and shares).

what is an ISA?

Basically, it’s a tax-free wrapper for either or both of savings or investments. Every year you get an allowance to use up. In 2007-08 you have a combined limit of £7,000 of whuch you can put up to £3,000 into savings - the rest can be placed into investments.

what do I need to do to use my ISA allowance?

Open some accounts and put some money into them. It’s no harder to open an ISA than it is to open any other bank account. It’s easier to open one now than wait until right before the deadline.

Look at your whole financial situation. Have you got any money in savings that can be put into a cash ISA instead? Think about the money you’ve got coming in over the next couple of month, can you use any of that to fund it? Think now about how to get together as much money as possible, ISA allowances are use it or lose it deals.

where should I open one?

If you’re looking for a cash ISA, the current best buy according to moneysavingexpert.com is the Icesave one which pays 6.1% interest, and has a minimum balance of £1000. If you’ve got less to put away, the next best is from Egg, paying 6.05% interest and has a minimum balance of £1.

If you’re looking for a stocks and shares ISA, really you need to have an investment plan and then find the cheapest way of doing what you want from that. Usually, a funds supermarket ISA will have the biggest discount on funds costs, the ones that I’ve heard people using are Fidelity and Hargreaves Lansdown but I’m sure there are others, do your own research.

First of all, you need to think about the purpose of the account, this will help you determine what sort of restrictions you can have on it. Key questions to ask yourself are:

• When will I definitely need to access this account?
• How far in advance will I know I need to withdraw money?
• Do I have a lump sum already, or will I be making regular payments?

Now you need to think about yourself. Are you happy to access money by post, in branch, over the phone, on the web? Do you need more restricted access to prevent you spending it accidentally? How does this compare to your need for access to the money when it is to be spent? Does it have to be with a bank or building society that you have already heard of?

Once you have determined your restrictions, I find that the best source of the highest paying interest account is money saving expert. At the time of writing this, they and Moneysupermarket say that the best options are:

• money tied up for a year, web-based Birmingham Midshires 11 month internet fixed rate bond
• £500 or more, tied up for a year, postal or telephone Anglo Irish Bank Fixed Rate Bond
• £1 or more, tied up for a year, postal or telephone, Derbyshire Building Society 1 Year Fixed Rate Bond
• £25 to £50 per month, regular saver, Lloyds TSB Monthly Saver
• £1 or more, no tie ups, web-based, ICICI Bank HiSave Account
• £1000 or more, no tie ups, phone or postal, Alliance and Leicester Direct Saver
• £1 or more, no tie ups, phone or postal, Anglo Irish Bank Easy Access
• £1000 or more, phone, postal or branch based, West Bromwich Building Society Premier Bonus Tracker 2
• £500 or more, branch based Post Office Instant Saver
• £250 or more Chelsea Building Society Bonus Savings
• £1 or more, Bank of Scotland Instant Access Savings Account

The interest rate on the regular saver account is 8%, and on the others, its between 5.75% and 6.9%.
Note that for the purposes of this discussion, I’ve assumed that a mini cash ISA isn’t suitable because you already have one. You can do the same sort of analysis to pick the best mini cash ISA, as long as you remember to obey the tax rules.

Although I posted on Saturday that I don’t think that anyone should rush out in a panic and withdraw their money from Northern Rock, I also don’t think that you should be holding vast sums of money in the bank. Not because they’ve suffered in the recent credit crunch, but because they aren’t the best buy for savings accounts. Its generally worth shopping round for the highest interest rate savings account from any regulated bank or building society. Generally, there’s very little to choose between savings accounts other than the interest rate as the best rates at the moment are from ISAs and instant access account, so there’s no good reason to tie your money up for longer.

I check to see which is the best account periodically, usually every year and then switch my money as relevant. I don’t think that you get anything for being loyal to a particular bank nor for a building society unless you are hoping to benefit from windfall shares. In any case, even if you do want to be loyal, you’ll get more out of your money if you stick most of it into the highest paying account and review it regularly. There’s really nothing more to savings accounts, they are a dull, unexciting but necessary component of any good financial plan.