UK savers have had to put up with woeful interest rates on risk-free cash savings accounts for many years now. And unfortunately, with economic uncertainty persisting and the high-street banks unwillingness to pass-on rises in interest rates, it may take many years for savings rates to return to more healthy levels.
Yet there are ways to generate higher returns from your cash savings NOW if you’re prepared to spend a few minutes re-positioning your money in the most effective savings products available on the market.
At Numeos, we have built a platform to help savers get more from their money. We help people make the right decisions and take the hassle out of switching accounts.
With that in mind, here’s a concise 5-step guide to getting the most out of your cash savings in the current low-interest-rate environment.
1. Get an up-to-date view of your cash savings
Naturally, the first step in boosting your cash savings is determining where your cash savings are currently held and what interest rate you’re currently receiving. It’s important to understand that high street banks often attract customers with attractive ‘promotional’ interest rates (which are often also capped at a certain level), only to withdraw the promotional rate after 12 months and revert to paying peanuts. So, it’s worth checking to see if you’re still receiving a decent interest rate on your money or whether your bank is now paying you very little in the way of interest.
2. Don’t leave more than six months’ worth of spending in your current account
Life is full of surprises and no one wants to be caught short financially. For this reason, it’s important to have an ‘emergency fund’ in place. It’s always wise to ensure that you have enough savings available in an instant-access account to cover six months’ worth of spending as this will provide you with a decent cushion should you need to pay for any unexpected expenses.
However, you don’t want to keep too much of your money in an instant-access account (or worse – in a current account), as inflation will erode its value over time. It’s important to have your cash working for you and growing at a rate that is above inflation.
3. Decide what proportion of your assets to keep as cash savings
Once you have your emergency fund sorted, it’s time to put the rest of your money to work. And the first step here is working out an appropriate asset allocation and determining the proportion of your portfolio that you want to keep in low-to-zero risk, relatively accessible cash savings.
Essentially, it’s a balance between risk and reward. While money held in cash savings is unlikely to grow as fast as money invested in growth assets such as shares over the long term, allocating some of your portfolio to low-to-zero risk cash savings has many benefits and should be part of your portfolio strategy.
For example, if you’re saving for a short-term goal such as a holiday, a house deposit or a wedding, and you’re likely to need the money in the next few years, it makes sense to keep the required amount in cash savings. It’s not sensible to place money that you might need in the short term in longer-term investment such equities or funds, as you could lose money in these kinds of investments.
Holding cash is also an excellent idea if you’re waiting for the right long-term investment opportunity to come along. In this scenario, cash savings provide you with options.
Furthermore, some investors, such as those nearing, or already in retirement like to have a significant proportion (as much as 50%) of their portfolio in cash savings simply to reduce overall portfolio risk and ensure that they’re not too overexposed to risky assets.
So, analyse your short-term financial needs, and work out how much of your portfolio you want to allocate to cash savings.
4. Open a savings account with Numeos
Once you know how much of your portfolio you want to keep as cash savings, the next step is to open an account with Numeos. Of course, you could also open an account directly with a bank offering a high interest rate, but then you would be missing out on our rate top-ups for no extra benefits.
Numeos is an innovative savings account platform that connects savers to specialist savings banks and provides savers with some of the best interest rates on the market (always within 0.10% of the best rates on comparison websites). The more you use the app, and interact with Numeos’ innovative fintech partners, the more Numeos tops up your interest rate. For instance, the average rate for a 1-year term deposit on the Numeos platform is currently 2.38% AER, which is significantly higher than the rates one would find on comparison websites.
The platform is 100% protected by the FSCS, as savers’ funds are placed in nominative accounts with UK-based banks, meaning that your savings are fully protected by the government at all times. If you have more than £85,000 to invest, Numeos will split your savings between multiple financial institutions to ensure that you are fully protected.
On a separate note, we don’t believe it makes much sense to place cash savings in ISA accounts as ISAs are more appropriate for longer-term investments that generate higher returns and larger tax liabilities.
5. Consider allocating money to peer-to-peer products or syndicated lending products
For even higher interest rates, it’s worth looking at peer-to-peer (P2P) platforms or syndicated lending products, as these asset classes have the potential to boost your returns even more, with relatively low levels of risk. By allocating between 20%-40% of your cash savings to these kinds of products, you could boost the returns on your cash savings by 1%-1.5%.
Of course, risk management is essential with P2P and syndicated lending products, so always use the most reputable platforms available (you can find a list of our preferred providers on the Numeos app) and spread out your capital over many different lower-risk loans, sectors and platforms. Start out by investing small amounts and gradually build up your investments as you gain confidence. To get the most out of P2P and syndicated lending, follow our guidelines here.
Risk Warning – With investment comes risk. The value of your investment can go down as well as up and you may get back less than you invest. Past performance or future projections are not indicative of future performance. We do not provide any investment, legal and/or tax advice. If this website contains information regarding capital markets, financial instruments and/or other topics relevant for investments of assets, the exclusive purpose of this information is to give general guidance on investment services available on NumeosMart.