Earning a decent return on your cash savings

Since the Bank of England base rate fell from 5% to 0.50% during the financial crisis in 2008/9 it has been hard to make a decent return on your cash savings.

Standard cash savings accounts are unlikely to pay you more than 1.5% per annum interest if you are lucky and if your savings account has come to the end of its initial term, you could find your cash savings are earning less than 0.50%!

Clearly these levels of returns are way below the current rate of inflation meaning your cash savings could be losing money in real terms.

You may have seen higher headline rates of return with the new so called peer to peer providers like Ratesetter, Zopa and others. Don’t be fooled by these higher rates. Always remember the higher return the higher the risk you take.

There are actually ways to get a pretty decent return on your cash savings using the banks that beats or certainly gets closer to inflation.

How much to have in cash savings

But before I explain how to increase the rate of interest on your cash savings let’s just take a moment to remind ourselves what cash savings should be for.

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen

You are never going to get rich by only saving into cash accounts. The only true way to grow your wealth over the long term is to invest your money in real assets such as stocks and shares and property.

However cash savings are essential for the following:

• Emergency fund of about 6-12 months of your current expenditure.
• Short term large expenses such as a new car, house or kitchen etc.

5 ways to get a better return for your cash savings and ensure it’s safe

1. Research

Use comparison sites and best buy tables like This is Money so you can compare the latest rates on offer.

The cash savings rates offered by banks and building societies change on a weekly basis so it’s always good to check back.

2. Check the provider is covered

You will find that nowadays there are lots of new banks hitting the market and they will offer better interest rates to win new customers.

There is nothing wrong with using a bank you are not familiar with as long as you have easy access to your money, they have decent service levels and are covered by the Financial Services Compensation Scheme (FSCS).

Remember that the deposit compensation scheme via the FSCS only guarantees to cover the first £85,000 per banking group per person.

3. Be smarter with your money

You will find that bank current accounts or regular saver accounts will actually provide you with a better interest rate on your cash savings than the more traditional savings accounts. The caveat is that the banks usually want you to make regular deposits into the account and have direct debits going out.

This isn’t a problem though as you can usually recycle your money through multiple accounts e.g. have it go in one account and then back out into a different one. As for direct debits, you can set up some very small direct debits to charity or for the National Lottery.

Be sure to check the small print though.

Don’t forget about Income Tax. This is paid on your cash savings outside of ISAs if the interest you earn in a year is more than £1,000 for basic tax payers and £500 for higher rate taxpayers. Try to shelter as much of your cash savings as possible in tax efficient accounts like an ISA. Or spread your savings between you if you’re in a relationship.

4. Diary system to change providers once initial rate finished.

The best cash savings rates are usually only for short periods of time so don’t get sucked in and then forget about the money. Keep a diary log/list of your savings rates and when the term ends so you can transfer it straight over to the next best rate.

5. Extra bonuses for first time buyers

If you’re a first time buyer saving for your first home then don’t forget to use Help to Buy ISAs or Lifetime ISAs. Both will offer a 25% bonus from the government on top of what you have saved when buying your first home. Far better more than any other cash savings interest rate out there.

Be sure to check the rules though.

To show you how you can put this into practice we recently set up a cash savings strategy for one of our clients living in London who is looking to purchase her first home. She is earning a good salary (needs to be careful not to go over the savings allowance and pay extra tax) so is able to save over £1,000 per month and has already built up some savings. The savings she has built up have been sitting in a cash ISA not doing much the last year or so.

New strategy:

• £250 per month to a new Help to Buy ISA.
• £250 per month to one regular saver paying 5% interest.
• Another £300 per month to a different regular saver paying 5% interest.
• Move the existing savings and leftover monthly savings to a better cash ISA which is earning 0.75% and combines with the above Help To Buy ISA.

If you would like an initial chat at our expense to work out how to get a better return on your cash savings please give us a call.

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.