RESIST TEMPTATION
With inflation up again to 4.8% on the traditional RPI measure it is
tempting to go for the highest possible return on our savings. It is almost
impossible to beat inflation even if you do not pay tax. But banks are
tempting us with two ways to do so. Both should be resisted.
First they are offering rates of up to 6% a year. But only if you invest an
amount equal to your savings on the stock-market. So if you put £5000 into the
account to earn 6%, another £5000 has to go into an investment in shares on the
London Stock Exchange. That invested half of your money carries no guarantees
and comes with charges and the risk that your money will be worth less at the
end of the investment than it was at the beginning. Such risks are fine if that
is what you want and you understand the risks and the reason for taking them.
But they are anathema to most cash savers and the temptation of even 6% on half
your money should be resisted.
Second, banks are offering the best rates to those who are willing to tie their
money up for as long as five years. You can earn more than 4% on such accounts.
With the Bank Rate stuck at 0.5%, earning nine times as much might seem a good
deal. But with inflation high and rising Bank Rate wont be there for ever
probably not for long. And as Bank Rate rises to its historic average a shade
under 5% a savings rate of that amount could soon seem bad value. But while
others will be free to take advantage of rising savings rates your money will be
locked into that 2011 rate until 2016. Tying up your money for five years is a
gamble on future interest rates.
So go for a twin track strategy. First, keep a significant chunk in an instant
access account. Pick the best rate with the six or twelve month bonus that they
all pay nowadays. Put an entry in your diary for a month before that bonus comes
to an end to give you time to research and move the money to the best rate at
that time.
Second, lock some of your money up for one or two years. And when that runs out
move it into the best account available then. If you want a five year investment
which gives you certainty pick one that lets you withdraw early with a
reasonable interest rate penalty if it begins to seem bad value.
You may not beat inflation but you will give it a run for your money.
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