Saving used to be the foundation of money management. Building up a cash sum for anything from a deposit on a first home to our old age was the first step to financial security.
Many people were able to live on the income from a large savings account.
Then came the financial crisis, followed by low interest rates. Savings stopped delivering attractive returns. Then, just as things (and potentially rates) were looking up came the Covid crisis, and interest rates on savings so low as to be almost non-existent.
But now, interest rates seem to be rising on some savings accounts. At Continuum we are looking at whether it is time to look at traditional savings again.
Saving rates are on the up at last
Banks have slowly begun to improve their interest rates after the Bank of England repeatedly raised the Bank Base Rate. Saving rates have hit a three-year high and could go higher still.
Several accounts that offer more than 2% interest have been introduced in recent weeks. Savers who can afford to lock cash away in one-year bonds will earn three times more interest this year after banks raised rates to post-pandemic highs.
Investing £10,000 in the best one year bond a year ago would have yielded £65 in annual interest. Doing the same today would earn £205, according to reports in the Telegraph. Instant access accounts are also looking more rewarding.
However, it may be too early to head for a bank on the high street with your cash.
Inflation is rising faster than interest rates
Despite the rise in rates anyone with cash savings will see the real value of those savings shrink in real terms because of inflation.
Inflation has surged to its highest level in 40 years.
It is not just conventional savings accounts that suffer from inflation. Savers using Cash ISAs as a home for their money will also see its buying power eaten away. The average easy-access Cash ISA rate rose from 0.3% to 0.38% in April. This was trumpeted as the biggest monthly rise since 2012, but the sad fact is that £1000 deposited in one of these accounts would diminish by £61 in buying power over 12 months purely due to inflation.
What happens now?
The Bank of England seems to be on course to steadily increase the base bank rate. This should mean that in the months to come, savings account providers can afford to improve their rates further still.
Some challenger banks may be particularly keen on offering better returns to build their customer base and their own cash holdings. It is essential to keep a close eye on the market and switch regularly to secure the best rates.
Putting your money away for longer can also increase your returns, with some five year fixed-rate accounts already offering 2% or more. But beware. Locking your money away for five years needs to be considered carefully at a time when rates are likely to increase further. Acting now could leave you stuck with an account paying much less than you could get elsewhere and there are usually substantial penalties for closing fixed-rate accounts early.
So what should you do?
It always makes sense to have an emergency savings reserve, of between three and six months of your usual income. But if you want to put your money to work for you and to grow, the answer may be to become an investor.
With savings, your cash stays as cash. With investment, your cash is invested most often into stocks and shares. Investments will rise and fall in value, however, over the longer term these may prove to mitigate the effects of inflation. Therefore, if you invest carefully for a few years, you have the opportunity of riding out these ups and downs and enjoying potential long-term growth – and crucially, this may beat inflation.
Whether you are worried about inflation or simply want to make the most of your money, investment could be the answer. See how we can help you become an investor.
Starting investing can seem a big step, but with help from the Continuum team, investing – in a tax-efficient ISA – can be as easy as saving. We can help you select funds where your money will be invested by expert managers with the aim of providing the growth or the income you need.
To find out more, simply contact us today.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
Equity investments do not afford the same capital security as deposit accounts.
The Financial Conduct Authority does not regulate deposit accounts.