Saving used to be the foundation of good financial management. Putting cash away to deal with emergencies, or to build up a cash sum for anything from a deposit on a first home to our old age was the first step to financial security.
The banks and building societies were only too pleased to help us become savers. They needed our cash to lend out to other customers and they would pay interest to encourage us to leave it on deposit with them.
Many people were able to live on the income from a large savings account.
But times have changed. It looks as though the banks don’t want your savings and they are certainly not keen on paying a good rate of interest on them. At Continuum we are looking at the reasons why – and at what you can do with your money instead.
A lack of interest…
Before the millennium, rates of 10% or more were not uncommon, even on easy access bank accounts. The banks were keen on bringing in the cash that allowed them to lend it out in personal and business loans and mortgages and were happy to pay for it – although of course the interest they paid savers was a fraction of the interest they charged borrowers.
Then came the financial crisis. To keep the economy from crashing, interest rates were slashed. Just as it started to seem that they should be going up again, the Covid crisis hit. This was met by rates that were so low as to be almost non-existent.
At the same time, the governments of the world began quantitative easing, more dramatically known as printing money. This meant that there was plenty of cash in the system, or rather in the banks coffers. The idea was that extra cash would mean extra funding for businesses of all kinds, keeping the wheels of the economy turning.
However, it also meant the banks need for savers’ money ground to a halt.
What happens now?
The Covid crisis is still not over, but it could be that normal life is becoming a real prospect for the near future. The Bank of England has even started to raise its own interest rate – the rate that underpins the rates the high street banks use – in an attempt to get inflation under control as the economy bounces back.
But although the base rate increased from 0.1% to 0.5% in recent months, the banks don’t seem too keen on passing on the increase to savers. You might still only earn 0.01% on easy-access deals from the big banks; Barclays, Lloyds (including Halifax), HSBC and NatWest (including Royal Bank of Scotland).
The simple reason is that they are already awash with cash, having benefited from an additional £187 billion savings accumulated since the start of the pandemic and total of around £974 billion sitting in easy-access accounts.
They don’t need to pay you to look after your money and the reserves are so high this is unlikely to change any time soon.
What can you do with your spare cash?
It is possible to earn slightly better rates on your savings with some smaller banks and online providers. At Continuum we can help you find the best performing accounts, but it might still be difficult to earn more than around 0.75%.
This is of course substantially below the current inflation rate of 5.5%, meaning that your savings will decline in value in real terms.
But all is not lost.
To make your money to work for you and to grow, the answer may not be savings but investment.
With savings, your cash stays as cash and the interest it will earn is predictable and low. With investment, your cash is used to buy something, such as stocks and shares. These may rise and fall in the short-term, but if you invest carefully for a few years, you have an excellent chance of riding out these ups and downs and taking advantage of long-term potential growth in the markets to provide capital growth – or income.
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 managed funds that are right for you.
To find out more, simply contact us today.
The Financial Conduct Authority does not regulate deposit accounts.
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.