With inflation expected to be on the rise over the next few months and possibly years, it is becoming increasingly difficult for savers to even keep up with the rising cost of living, never mind beat it in order to protect their cash in real terms. Inflation is the saver’s enemy.
With rates at record low levels it’s understandable that you may not want to tie all your money up for the long term, just in case. However, for those happy to lock money away, there is a clever trick that could see you always earning the best long term bond rates on the market on all of you cash, without having to lock it ALL away for the longer term. Here’s how.
Let’s say you have £50,000 and you just might need some of it in a year’s time, but on the other hand you might not.
You could either invest the lot into the best 1-year bond and review your situation in 12 months, with the expectation that you’ll roll the lot over again or you could do something a little bit different.
In order to boost the income on this lump sum you could put £10,000 into a 1-year bond which will then be available in a years’ time, put a further £10,000 into the best 2-year bond, another £10,000 in the best 3-year bond, then 4-year bond and finally the last £10,000 in the very best 5-year bond. After 12 months, although you only have access to the £10,000 in the maturing 1-year bond, plus the interest the bond has earned, the other bonds have all been earning more.
Here’s an example of just how much more.
So in this example, you’d have earned an extra £95 in gross interest in year one - £520 as opposed to £425.
But of course, the downside is that you will only be able to access £10,000, plus the interest from all the bonds after the first year. The other £40,000 will remain invested.
But if you don’t actually need the first £10,000 that has matured, you could reinvest it into a 5-year bond this time around, as you’ll have another £10,000 maturing from the original 2-year bond in just 12 months’ time.
So, assuming rates remain the same, you’ll be even better off in year two. This example assumes the interest is withdrawn each year.
Year 2
And so on.
By the 5th year, all your cash will now be earning 5-year interest rates, but a fifth of it will be maturing each year, should you need it.
Of course, this only works if you don’t anticipate needing access to the money and it’s a bit fiddly to start with, but it could just help you squeeze that little bit more from your savings. – and if that’s the case, with rates so low, you might want to consider alternatives to cash for this money anyway. But if not, it’s a plan you could start to put into action.
If you’re disheartened with the rates being paid to savers and think you might be holding too much in cash, perhaps you'd like to explore other options, so why not get in touch. We’re currently offering all those with £100,000 or more in savings, investments or pensions a FREE financial planning review with one of our TPO colleagues, worth £500. You can find out more here.
RATES CORRECT AT THE TIME OF PUBLICATION - 13/05/2021
@savingschampion
Find us on Facebook