Interest rates suck right now.
Interest rate cut, after interest rate cut, after interest cut. It feels like every couple of weeks I’m getting a new email from Monzo that the interest rate on my savings pot is going down. It’s down to 0.30% which is an abysmal return, unfortunately. This is happening with all banks. Interest rates are going down across the economy, and although it means it’s cheaper to take out a loan, it also means you earn less on your savings.
If you have some savings and you’re just keeping it as cash in your current account then this is for you. Money sitting in an account making 0% interest will lose its value over time because of inflation - namely the prices of things rising. One year from today, the same amount of money in your savings will be able to buy you less. At the time of writing this, the inflation rate is 0.8% so that’s the number to beat. You want to at least be making 0.8% return on your savings. It’s not much, but when all banks have brought their rates so low it can become tricky.
Your plan of action
This is a great time to take a look at your finances and plan out some things. The order of business is:
- Pay down high interest loans. If you’re paying anything with an interest rate over 3% now is a good time to pay off as much as you can or even consider refinancing. That means to take out a new loan at a lower interest rate to repay your existing loan in full. You can find options for that on Money Saving Expert.
- Build up your emergency fund or as someone called it recently, the fuck-off fund. Now more than ever we can appreciate the need for a secure pot of money. The rule of thumb is 3-6months of covering your expenses, assuming you didn't have a job or are looking for one. This money should be kept in an easy-access savings accounts. Right now, the 2 best easy access savings accounts in the market are: Marcus by Goldman Sachs (1.05%) and NS&I Direct Saver (1%).
- Saving for a home deposit. If you’re saving up for a home that will cost less than £450,000 then you should get a Lifetime ISA in which the government will add a 25% bonus to your savings. The maximum you can contribute is £4,000 per year (or £333 per month). If the conditions of a lifetime ISA work for you, then try to max out these monthly contributions.
- Investing. For money that you can put away for a longer amount of time and let it grow, you really should be investing it. Investing is not gambling and with patience the market brings returns. As long as you’re not putting your emergency funds here and you can wait out any downturns in the market, in the long-run the stock market will yield much higher returns. Since its inception in 1926, the S&P 500 which tracks the 500 biggest stocks in the US, on average returns 10% a year.
- If you know a little bit about the market already and want to select stocks yourself then get an app like Freetrade, Trading 212, or Hargreaves Lansdown to open a trading account and buy stocks freely. Historically however, active investors don’t over-perform the market so even if you know about and follow stocks, its not always the best option.
- The best solution in my humble opinion, or if you just don’t want to think about what stocks to invest it, then sign up for a robo-advisor or wealth management platform that will do the work for you, for a small fee (0.15% is the lowest). In order of lowest fees I’d recommend Vanguard, Fidelity, and Nutmeg.
That's it. A bit of planning and your money will be working for you!
Illustration by Anwar Hossain.