1. The problem: Did someone in the government recently get fired for saying that we’ve never had it so good? While a lot of us would argue that we’ve never had it so bad, there are also those who would agree with the more positive opinion. I’m not going to get into that argument myself, lest I get fired. However, it is clear that there are two sides to the argument – depending on which side of the fence you sit on. For those who still have jobs, low interest on mortgages means things aren’t so bad because low interest rates mean low monthly repayments, which has to be a good thing. It is, however, quite discouraging for the saver at the moment, with savings rates at an unprecedented low. So what do you do if you have savings and want a decent return on them?
2. Just how bad is it? First of all, let us define ‘decent return’. While most savings account are returning around 0.5%, the best instant access savings accounts at the moment struggle to return 3% gross, which, when tax is taken off at 20% leaves you with 2.4% net – and that’s if you are a basic rate taxpayer. If you are a higher rate taxpayer, it gets worse, with 40% taken off leaving you with a return of 1.8%. Even if you stick your money into a cash ISA and get the full tax-free 3% , that feel-good factor is dampened when you discover that the retail price index is currently at 4.5%, leaving you with real world interest of -1.5%.
3. Don’t be discouraged: With such bewildering figures, the temptation is to not save at all. After all, the truth is quite painful when you learn that you are actually losing money by sticking your cash in a savings account. Why not simply spend everything you have? The idea is, however, not to despair – interest rates may be poor for the saver, but saving and being prudent is still a good thing.
4. Have a plan: One of the best ways to manage your savings at the moment is to consider the three-pronged approach to saving. It works like this:
a) Everyday savings: Because it doesn’t hang around long enough for it to be adversely affected by poor rates of interest and high inflation, the return you get on this money is not of critical importance. Put this money in a high-interest, instant-access savings account or current account, keep the balance low, and don’t get too hung up with interest rates.
b) Rainy day savings: In the hope that rainy days don’t happen to you too often, this money should hang around a little longer and therefore requires a good return. Why not consider a cash ISA? Expect a tax-free return of as close to 3% as possible if the interest rate is variable and closer to 4% if the interest rate is fixed. The good news with most cash ISAs is that you are able to get access to your money in an emergency, albeit with penalties.
c) Long-term savings: This is probably the most difficult bit of the equation. To receive a decent long-term return today would probably involve investing in a portfolio of stocks and shares. Such investments carry a degree of risk but have been known to work well in an environment where interest rates are low. It is essential to discuss your long-term savings objectives with an independent financial adviser, who will explain the risk and reward potential and create a suitable investment portfolio for you.
5. Review your returns: It no longer pays to be loyal to your savings bank. Review your affairs periodically with your financial adviser to ensure that you are receiving the best possible return on your hard-earned money. If there is better out there, make the switch. Get started now. With inflation increasing on a daily basis, the worst thing you could do is nothing.