It’s not under the mattress.
Last time out we spoke about how much cash you should hold, this week it’s where to hold your cash savings. Everyone should hold a cash buffer in case of unexpected expenses or loss of income. I provide three options below on where to hold your cash, based on the amount of effort you want to put into maximising your returns on cash: ‘super keen’, ‘lazy’ and ‘bordering on sloth’.
Very few will have the time to monitor the latest interest rates for a minor additional return and therefore most people will find themselves in the ‘lazy’ category with cash management. I also don’t judge any decisions that border on sloth when it comes to maintaining your cash balance. Keep it simple but make it effective. In most cases, there’s more important ways to spend your time in my opinion.
Super keen – continual monitoring
You will want to watch out for the latest interest rates and open accounts with those that offer the highest rates. The super keen option is not for the feint hearted. Often banks entice new users with great interest rates only to decrease them soon after. Anyone still have a Marcus account?
Lazy – NS&I
I tend to use National Savings & Investments (NS&I) for my cash savings. The savings are backed without limit by the UK government and interest rates shift broadly with the market. Interest rates may not be the absolute best, but they’re always competitive and it avoids chopping and changing accounts regularly.
You have two choices for instant access cash management with NS&I outside ISAs. Go for the guaranteed interest rates offered by the Direct Saver and Income Bonds OR opt for premium bonds. Premium bonds offer a monthly prize draw rather than a guaranteed return, prizes are tax free, the average prize rate tends to be slightly higher than the guaranteed interest rates on offer and there’s always the chance to be one of the two lucky £1 million prize winners each month. It’s better than doing the lottery in my opinion. Maximum saving in premium bonds is £50,000.
Bordering sloth – same bank, new account
I encourage all MUVADO members to hold cash savings in a separate account to their current account. If you cannot be bothered to open an account with a new bank then you can use your current bank and a separate place.
Most banks will offer an ‘easy saver’, or in newer online banks you can open a new ‘pot’ outside your current account. Set up your monthly standing orders and be less tempted to dip in. The interest rates might be rubbish but separated saving is better than no saving.
|The best place
|Current bank savings account
|Highest possible return
|Backed by UK government
Multiple bank accounts open
|Website a bit ‘old school’
Temptation to ‘dip in’
Things to note
- Max £85,000 per individual. The Financial Services Compensation Scheme (FSCS) only covers deposits up to £85,000 per individual per banking license.
- Savings interest is paid gross. Basic rate taxpayers can receive £1,000 tax free, higher rate taxpayers £500 and additional rate taxpayers none. Report your savings interest as part of your tax return if it is taxable.
- ISA allowance. You might want to use an ISA for cash savings. Holding stocks and shares in an ISA can be more tax advantageous for some. Make sure you do not exceed your total £20,000 annual allowance each tax year.
If you’re holding a lot of cash and want to chat about your options, book a call with me here.