Today, if you put your money in a savings account and leave it unattended for some time, you are likely to be very disappointed at what your investment produces in the end. Inflation in the UK today, as measured by the Consumer Prices Index, stands at 2.7% a year. The base rate for savings accounts, on the other hand, is 0.5%. What this means is that you actually lose 2% of the value of any money that you leave in your savings account.
Why do banks offer practically no interest now? One reason is the government’s Funding For Lending Scheme. Under this scheme, banks are able to tap into very cheap loans from the government. The banks no longer need money from their retail customers badly enough to pay them a reasonable interest rate.
If you are to beat inflation today, you need to find a savings account or another investment that pays at least 3.5%. How do you manage this? The answer is that you have to look at investment options other than savings accounts.
Opening a current account could be a possibility
While the banks aren’t interested in savings account customers, they do compete fiercely among themselves for current account customers. On current accounts that have high minimum balance requirements (at least £1000), they can pay high interest rates for a time – up to 5%.
Most banks only offer this attractive interest rate for a fixed period of time on up to £2500. You can’t put in thousands of pounds to make high interest on all of it. You can invest £2500in these accounts for the interest. For the rest of your money, you need to look elsewhere.
Investing in credit unions
Many credit unions announce deposit schemes from time to time that pay out reasonable interest. You need to look for a credit union that has a good rate going, though. Many people worry that they could lose money that they place in a credit union. Credit unions, though, are covered by government’s Financial Services Compensation Scheme for up to £85,000.
You could try social lending
Peer-to-peer lending is popular today. A peer-to-peer scheme has individuals lending money to each other through a service that helps bring lenders and borrowers together. To earn interest in this way, you find a peer-to-peer website like Rate Center or Funding Circle to deposit your money with. They find borrowers to lend your money to, for interest.
Many people balk at the idea of lending money to perfect strangers. What if this stranger were to refuse to pay back?
The reason social lending works is that your money is not directly given to borrower. Instead, the service is about only exposing each depositor to a fraction of the risk that each borrower represents. If a borrower wants £1000, the service takes money from 1000 depositors. If the borrower defaults, you only lose £1.
The one risk you need to watch out for is that the lending business going under. Money deposited with these websites is not covered by the government’s FSCS.
We live in changed circumstances today
In an investment climate where easy savings methods actually lose you money, you need to constantly keep yourself updated and informed by reading websites like Money Vista and taking a few well-calculated risks.
Jon Custer always has his eye on finance news. An avid blogger, you can read his posts on various financial sites. To find a helpful savings calculator, visit the link.