Today the Bank of England voted again to keep UK interest rates (i.e. the base rate) at the record low of 0.5%. While they have warned that it will rise if the economy keeps growing as forecast, no-one can predict exactly when this will be.
On the one hand, this is positive news for borrowers whose cost of debt is linked to the base rate, e.g. for those of us with tracker mortgages. On the other hand, when it comes to our savings, it will mean we have to get really smart with our money in order to see it grow, and I mean REALLY grow.
Here’s the crux of the matter: if your money is not growing by more than inflation, then it is not growing at all. In fact, you are losing money.
Currently, the best rate you can get on an instant-access cash ISA is about 1.06%. And, if you’re prepared to lock your money away for the next 5 years, you can get about 2.15%*. With inflation currently at 2.9% and forecast to go above 3% in October (that’s the CPI and not the RPI which is a lot higher), then these Cash ISA rates are pretty dismal. If this is all you are earning on your hard-earned cash, then your money is actually decreasing in value by at least 0.75% in real terms. So, what then are your options?
Thankfully there are options available to us, but like anything in life, there is always a trade-off. The trade-off is the first fundamental rule to making your money work for you and that is the relationship between risk and reward: the higher the risk, the higher the reward and the lower the risk, the lower the reward.
Keeping this relationship in mind, experts from around the world agree that equities are still one of the best ways (over the long-term) to grow your money with inflation beating returns. One only has to look at the FTSE 100’s performance over the last 12 months to agree that this makes sense…..it grew by about 15%. I would like to emphasise though, that equities are a long-term investment and should not be entered into blindly. Get yourself educated beforehand and don’t forget to use your ISA allowance first.
Secondly, experts also suggest that in times of low interest rates, bonds can be an attractive option. The two main options here are corporate bonds and gilts. Although with the country bailouts we’ve seen in recent years, one has to ask whether gilts are indeed as low risk as they used to be.
A third option which is gaining popularity is social lending or peer-to-peer (P2P) lending. So what is P2P lending? It is the lending or borrowing of money between individuals and ‘peers’ without the intervention of a traditional financial institution. A number of P2P lending platforms have been established to bring such lenders and borrowers together. The reason that this is becoming increasingly popular is because of the favourable rates on offer to both lenders and borrowers alike. Be aware, any savings via this option are not covered by the Financial Services Compensation Scheme.
The bottom line is this, don’t leave your savings to chance, not if you want to see them grow. It’s up to you to take control and be deliberate about growing your money.
In my attempts to keep this brief, I’ve only skimmed the tip of the iceberg. If you’d like to learn more, I’m running a once-off Investments 101 workshop on the 28th September 2017. For details get in touch with me on: firstname.lastname@example.org.
*According to Money Saving Expert