Money Matters! #3 Deposit Accounts

Having started to understand that we owe it to ourselves that we really do need to know a little more about our personal finances it is easy to go one of two ways. Some think that it cannot be so difficult and a little bit of research online will have all the questions answered, whilst others feel that when starting to do that research they then realise that there are so many different angles to everything that it is very easy to get lost and think they know even less that when they started.

As with everything, it is best to approach personal finance, investments, and savings by breaking it down into sensible parts and then looking at these parts one by one and in a reasoned order. This is easy to do with personal investments and savings as they are easy to rank from the most widely available and simple (often with the lowest risk and lowest return) to the more sophisticated and complicated (often with a higher risk / reward profile).

So let’s list out some of the forms of savings and investments that attract many people. Those at the top of the list are generally more popular and easier to understand and have a lower risk and return than those lower down the list:

  • Deposit Account (in a bank or building society)
  • Premium Bonds
  • Government Bonds
  • Unit Trusts / Investment Trusts
  • Equity (shares in UK and foreign public listed companies)
  • Property (buy to let)
  • Commodities / Foreign Exchange
  • Fine Wine / Art / Classic Cars
  • Cryptocurrencies
  • ETFs / Futures

Each of the above has many divisions and subsectors and there are also many other ways in which some people invest either for capital growth or for income.

But as I have said, let’s do this in easy stages. As with everything to do with investments and savings you should start with the question ‘what do I want this money to do for me?’ And let’s start with the very simple sounding Deposit Account. All of what I will say here and on all products should only be taken as a generalised guide as it is simply not possible to go into great detail and in any event that is not our purpose. So, some very simple ‘rules’ first:

  • Instant access accounts pay a lower interest rate than locking your savings away for longer
  • Unless the interest rate that you are receiving is the same or higher than the level of inflation then you are losing money every year.
  • The vast majority of such savings accounts are guaranteed by the UK government up to a maximum of £85,000 per person/institution against the failure of the institution
  • You can only open one ISA per tax year (whether cash/equity/mixed) but this can be for up to £20,000 per year

Now a little more detail.  Most people should have cash savings of some sort as they are the simplest and arguably most liquid form of savings and so at the very least they are ideal for the rainy day fund to cover unexpected bills.  They are also good for relatively short term savings for things like holidays.  They are almost totally risk free if they are with a major institution BUT, for many years interest rates have been lower than the level of inflation and so your savings effectively lose money every year making them less than ideal for medium or longer term savings in my view.  It is for that very reason that I personally see having a cash ISA as a wasted opportunity as interest rates on ISAs are often worse than are available on normal accounts and the tax breaks are irrelevant to most people on savings generating no taxable income or capital gain – much better to use an ISA for stocks/shares/unit trusts (more of that next time).

Now that you are armed with a little more information you are better placed to decide what type of deposit accounts are right for you and how you want your money to work for you but be sure to find the best institution with the best terms and interest rates for your needs. Lastly, you should check the interest rates regularly as all providers are prone to reducing rates on existing accounts and introducing new accounts paying better rates so do not be afraid to change accounts or institutions to stay on top of the game.

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Nothing in the above article is intended as a recommendation but simply the author's opinion on what readers should be thinking about


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