So you’ve made a budget and now have the capacity to put some money away each month, or perhaps you’ve come into some money unexpectedly. The question is: what do you do with it?
You sure as heck don’t want to spend it all or inflate your lifestyle. All of you responsible readers know that that would a silly idea! One option would be to try and generate some passive income from investing – similar to what I wrote about a couple of weeks ago. For some however, investing is just not an appropriate choice; probably for one of the following reasons:
- You deem it too risky – you don’t have the time or confidence to learn the stock market and would worry too much
- You might need easy access to the money – stock market is not the best place to invest for an unknown duration
- You can’t risk losing any of it – again investing is a lot riskier than stashing it in a bank account
- You already have money in the stock market and want to diversify your portfolio
Whether it be one of the above reasons, or something else – we should all know a little bit about maximising our savings with the bank.
Here’s a quick guide on making the most of what money you do have to save.
Where to start
You’re definitely going to be tempted by the most high interest savings accounts, as this is clearly the best way to ensure your savings work as hard as they possibly can. But the highest rates of interest aren’t always available to you, as it will depend on your individual circumstances, so it’s important to ask yourself the following questions:
- How much do I have to save?
- Can I only put a certain amount away each month?
- Can I afford to lock away a lump sum for a defined period of time?
- Do I need access to my savings?
- Should I be paying tax?
Let’s start with the latter:
Tax
No one wants to pay tax if they don’t have to and creating a Cash ISA the ideal place to start your savings future. With a standard savings account, you’ll have to pay a certain percentage of the interest you make to the Government (for basic rate tax payers this is set at 20%). Saving through a Cash ISA removes this requirement and lets you save a specific amount each tax year (your ISA allowance) without paying any tax on the interest you make.
For the current tax year, the ISA allowance is set at £5,640 for a Cash ISA, set to increase to £5,760 on 6th April 2013. Some ISAs are definitely better than others – those that are managed online typically have higher interest rates. Some ISAs have a clause that will only pay out the full interest rate if you don’t make any withdrawals throughout the tax year. Consider your circumstances and find an account that meets your needs.
Locking away a lump sum
One of the best ways to secure a high interest rate for your savings is by opting for a fixed rate savings account, also called fixed rate bonds. This means that you lock away your savings for a specific period of time in exchange for the best rates of interest. Once you make your first deposit you’re unable to add to it or withdraw from it until the term is up (you may suffer rate penalties if you do so). If you have a lump sum and you don’t need access to it for one or two years, a fixed rate savings account is one of the best ways to really make your savings work for you. Consider that interest rates in the UK are linked to the Bank of England base rate and can go up as well as down. Locking away your money can sometimes be a disadvantage.
Easy access savings account
With this type of savings account you can deposit funds and access them as and when you need them. You may not get the best rate of interest, but it’s a good place to start to get into the habit of saving. Once you’ve done this, you can look at your other options to increase your savings pot. If you are not using your ISA allowance, you are probably better off putting the money in their – even if it is for the short term.
Starting to save is only half the battle, it’s vital that you make the most of what you have.
Final Thoughts
I strongly believe and advocate that you should create yourself a diversified portfolio. I would consider investing all your money in the stock market as foolish, similar to how I would consider leaving all your money sitting in the bank stupid (allowing the banks to make more money for themselves). No matter what type of saver you are or how disciplined you are at putting money away; we should all have easy access to some cash. Furthermore, anyone in the UK who doesn’t take advantage of their ISA and saves money elsewhere – needs their head’s examined! Why would you voluntarily pay tax?!?!
Need more convincing? Here are 5 Reasons Why Savings are Important.
I would disagree about your risk assesment…
Putting your money under the mattress is a GUARANTEED way to lose against inflation, sticky-fingers, theft, fire, etc.
And the bank account guarantees that you will lose money to both inflation, AND bank fees, as well as the odd bank book-cookery, or bank collapse.
When buying stocks, (unless you pick all losers… which you really can’t if you stick to index ETFs at first) your money has a very good chance of going up… An infinitely better chance than the other previously mentioned methods!
I hope all is well on your side of the pond!
Bank fees in the UK are minimal (unless you go overdrawn when you shouldn’t or miss a payment). For a lot of the older generation and others who have a short-term plan to do something with their cash; bonds, stocks, funds etc. are just not an option. Furthermore, Emergency Funds are always better off in an account paying the best possible interest.
I’m definitely not advocating putting all your money in a savings account (most of mine is in stocks and funds) but for the portion there is – there are definitely options!
Things are good over here mate cheers (other than the fact it is cold [not winter and definitely not yet spring kinda mode]) 🙂 – how’s tricks with you?
Must be nice… Seeing as nationally Canada only has 6 banks (5 key players, 1 not as much) they have free reign to charge whatever they want. For example, the best rates for savings were dominated by ING Direct… which was bought out by BNS.TO (scotibank). They promised to remain “hands-off”. Which I’m sure will last no longer than the license agreement with ING NV to continue using the branding. So I’m guessing in 18 months, they will fold it up just like what happened to ALLY financial. Which was just purchased by RY.TO (Royal Bank of Canada) and then promptly shuttered.
So while the banks here do offer “savings accounts” the interest rates are pathetic. 0.05% is the going rate. And yes, I didn’t double up those Zeros either.
So in Canada, the savers are truly SOL.
As for me, I’m tired…. oh so tired. The 2y/o is relentless and doesn’t sleep. I don’t know how he does it!
My investing activities are chugging away as expected. My accounts are now approved to trade “naked puts” so all I need to do is come up with enough money to “secure” my positions rather than only being able to write a handful of contracts at a time… So far so good though with those contracts!
Right now we’re not very diversified, but plan to spread our money out a little bit in various investments, specifically rental property that will be paid in full by retirement (hopefully long before that) and producing income.
Rental property is DEFINITELY something that I plan to get involved with soon! 🙂
I have too much money sitting in the bank right now. Guilty! =/ I do have a short term plan for some of it though. The rest is my emergency fund.
What’s your plan… Don’t say another trip to the Dominican 😛
Letting your money sleep in the bank for a long time is a big loss on your end. As soon as you have enough money in your savings account, I believe it is necessary to invest that into different investment portfolio. Take advantage the power of compounding interest plus the time.
Some self-made millionaires they used their savings to set up business.
Top 10 Wealth Building Books
Savings to set up a business is definitely something I plan to do when I eventually start my Dive School. For now I will continue to invest in the stock market and keep some cash for emergency / other purposes. For the older generation who have big savings – a lot of them are reluctant to more their money outside of a bank account. In this situation, it is definitely worthwhile choosing the right account! 🙂
I have a ton of money in bonds to support my kid’s coming college costs. In my IRA, though, I’m nearly 100% stocks and real estate.
Good man! Bonds are a great strategy for kids education – I will probably invest in something similar when the time is right
I would use the ISA for stock and shares since the return is likely going to be greater than the cash ISA. Better have that tax free. And since withdrawal are lost, maybe still keep some cash out of the ISA until April, then lock what is left if any in the ISA.
This is exactly what I have done! 🙂
Not sure, I think you can keep what you put for the tax years you were a resident, I emptied it anyway to buy cattle!
We have our networth spread out across mulitiple asset classes. When it comes to our brokerage account though we almost always have 20% in cash.
Sounds like you have it nailed… with a blog title like yours Marvin – I would hope so 😉
I’d prefer crying in a helicopter, but a Lambourghini will do
Haha Sweet! Can you fly a helicopter? I want to learn big time…
Once my debt is paid off and I start investing more I’m not going to keep all of that money in the market. I think that it’s important to have some money in a moneymarket account so that when stocks go on sale I’ll have cash to buy them.
I would never put all my savings in stocks either. There’s too much volatility and it’s impossible to win all the time. I try to keep a pretty diversified investment portfolio to lower my risk. I love CDs and wish rates would go back to 4-5% but that’s just not going to happen anytime soon.
Good point! I agree.. that could be a decade away 🙁 – have a great weekend