Cash - what are your options?
May 2009
Cash is typically regarded as the ‘safest’ asset class around. You put your money, often called capital, into a ‘savings account’ and every year the bank or building society adds interest, although some accounts do not offer any interest at all.
How much you earn in interest varies, but generally you can expect your money to grow slowly and steadily. More slowly now since the cut in interest rates. The good news for savers is that the fall in inflation will help increase the real rate of return on their savings. When inflation is higher than the rate of interest offered there is a big risk to the real value of your money as you will not be able to buy as much as you could.
Savers tend to just see the headline interest rate and not the real interest rate (the rate offered less the rate of inflation). Cash is only worth what it will buy. Real interest rates could actually end up being better in some cases than before so it is more important than ever to shop around for the best rates.
The main advantage of cash is that it is a relatively liquid asset. That means you can get access to it quickly to either invest it or spend it as you wish.
Is my money safe? With the recent credit crunch and banks buying each other up you may wonder if your money is safe and what your safeguards are. Find out more about protecting your money on deposit in our What’s new – How safe are your savings
However, despite much lower interest rates now being offered, there are still a number of options open to you and decisions to be made about how to make the most of your money.
Savings accounts
There is a huge range of savings accounts on offer, so which one should you choose? Savers may face very limited returns when interest rates are very low and could struggle to find accounts which appear to offer a decent return. However, many banks are still looking to attract more deposits.
The account with the highest rate of interest may be what first draws your attention, but you need to consider the amount of notice your bank/building society requires before they let you withdraw your money, and if that will suit you.
‘Instant access’ or ‘easy access’ accounts tend to pay a lower rate of interest and sometimes no interest at all. Many however offer some good benefits such as travel insurance and breakdown cover which is a real benefit in times of low interest rates.
Current accounts are useful if you want to get hold of your money to meet unexpected costs in a hurry. Most are now offered online and some pay a comparatively competitive rate, but as with all financial choices it usually pays to shop around and look at any benefits offered.
While a ‘notice’ savings account may give you a better rate of interest, you could have to wait weeks or months to get your hands on your money.
Regular savings
As well as looking around for the best deals, you could also think about cultivating a savings habit and becoming a regular saver. As a regular saver you have a much better chance of hitting your long term goals – especially considering that access to credit and loans is not as easy as it was. Read our Quarterly Savings Survey and see the evidence for yourself.
Regular savers can sometimes attract some rewarding offers. Many accounts provide a lump sum bonus at the end of the year. Others offer higher interest along the way, provided you commit to investing a set amount every month over a set period.
Cash ISAs
For many people a cash Individual Savings Account (ISA) is the first step on the road to investment. ISAs have one outstanding advantage over most other savings accounts - the interest payable is tax-free, so if you are a taxpayer this gives the interest on your savings an immediate boost.
You can currently invest up to £3,600 each tax year in a cash ISA if you are 16 or over and resident in the UK for tax purposes. However if you will turn 50 between 6 October 2009 and 5 April 2010, or are already 50 or over, your annual ISA investment limit will increase to £10,200, of which £5,100 can be saved in cash, with effect from 6 October 2009. These higher limits will then apply to everyone from 6 April 2010.
For more information on ISAs, see our feature Just start saving
Money market funds
If you have a large sum of money sitting in a simple savings account that you think could be put to better use, you could consider investing in the money markets.
Run by banks across international markets, they invest in a wide range of essentially short term deals. Although they tend to produce a higher return than a savings account, they are subject to more risk and you need to check that your money is both safe and if it is protected by the Financial Services Compensation Scheme limit of £50,000 per institution.
If you are interested in finding out more, speak directly to your bank and see what they can offer.
Want to know more?
If you want to delve deeper and look at more savings options, read our feature Just start saving.
