Where should I put my rainy day fund of £10,000?

29th October 2014

Question: “We have built up a rainy day fund of £10,000 and we were looking to put it somewhere where we can get as much interest as possible. We need to access the money in an emergency, so do not want to tie the money up and we are wary of risking the capital by investing in stocks and shares.”

Anna's response: Essentially, you are looking to get as much interest as you can from your rainy day fund, whilst still being able to get at your money in an emergency.

The logical answer would be to look at traditional Easy Access savings accounts, as these would be suitable for getting access to your funds in an emergency; however the returns are currently relatively low. There is however a much better option that could be suitable for all your stated aims and would earn more than 3 times the interest.

High Interest Current Accounts

In order to maximise returns and retain emergency access to your funds, High Interest Current Accounts have become the go to savings accounts for the savvy saver, so could be suitable. The best thing about this option is you don’t even need to switch your main current account to open them.

High Interest Current Accounts offer some of the very best interest rates on the market at the moment, although the maximum you can put in an account is significantly lower than most standard savings accounts. With rates of up to 5% available it’s easy to see why many savers are turning to banking to get the best returns.

The table below shows the most competitive High Interest Current Accounts at the current time and below is a handy step by step guide with tips and tricks to simplify the process.

Account

Maximum Deposit

AER

Notes

Nationwide - FlexDirect Current Account

£2,500

5.00%

£1,000 new funds required on a monthly basis.

Rate falls to 1% after 12 months

TSB Bank - Classic Plus Account

£2,000

5.00%

£500 new funds required on a monthly basis.

Must register for Online Banking.

Lloyds Bank - Club Lloyds Current Account

£5,000

4.00%

£1,500 new funds required per month or a £5 fee will apply.

Must set up a minimum of 2 Direct Debits per month.

4% interest paid when balance is above £4,000.

Santander - 123 Current Account

£20,000

3.00%

£500 new funds required per month. 

3% interest paid when balance is above £3,000.

The account has a monthly fee of £2.

A minimum of 2 Direct Debits per month are required.

 

Most High Interest Current Accounts come with various terms and conditions which need to be followed carefully to be able to hold the account and ultimately benefit from the interest rates on offer.

Most accounts require a minimum amount of money to be deposited into the account each month. The amount varies from £500 per month (Santander) to £1,500 (Lloyds Bank). Most providers stipulate that funds would need to enter the account from an external source.

Some High Interest Current Accounts also require a number of direct debits to be set up to come out of the account on a monthly or annual basis. This requirement can usually be satisfied with bill payments or even a charitable donation.

With careful planning which we have done for you below, you could open several accounts with various providers, ensuring that money is transferred from one account to another and from your main account to satisfy the account conditions.

More information can also be found on our best buy table.


Step by Step Guide on how to get 5% on your Funds!

Step 1 – Opening the Accounts

The first action to take is the application process for the highest paying account; this can be done quickly and simply online now. At the current time Nationwide’s FlexDirect Current Account is the market leading account. Between yourself and your partner you can open 3 of these accounts. One in your sole name, one as a joint account and one in your partner’s sole name.

This allows funds of up £7,500 to be paid the market leading rate of 5% AER within these 3 accounts.

For the remaining funds I would recommend you open two TSB Bank Classic Plus Accounts, one in your sole name and a joint account with your partner. This will allow a maximum of £4,000 between these accounts to be paid 5% AER.

This then will leave you with 5 current accounts all paying 5% interest upon your sum of £10,000.

Time Scale – 5 minutes per account

 

Step 2 – Ensuring you satisfy account requirements

Wait until the accounts are all open then the next step is ensure the requirements for the accounts are met so you receive the market leading interest rate on your funds.

To separate your funds between the accounts I would advise depositing £2,375 in the Nationwide accounts and split the remaining funds into the TSB accounts (£1,437.50.) This is to ensure you generate the most interest without exceeding the interest paying limit!

For the Nationwide Current accounts you will need to ensure that £1,000 of new funds enter the account on a monthly basis. These funds also have to come from an external source therefore an account that is not held with Nationwide.

Similarly the TSB Bank requires the same format of standing order, but for the amount of £500.

The system I recommend is demonstrated below. The most efficient method would be setting a standing order for £1000 from the current account you use at the current time to the first of your 3 Nationwide accounts and then to TSB account 1 and so on.

Standing Order Set Up Stage

Action 1.              Log into the current account you use at the current time and set up a monthly standing order to transfer the amount of £1,000 into the first Nationwide Account.

Action 2.              Log into the first Nationwide account and set up a monthly standing order for £1,000 to the first TSB account. Make sure it is set to the same date chosen in Action 1.

Action 3.              Log into the first TSB account and set up a monthly standing order for £1,000 to the second Nationwide account. Set to the same date previously used.

Action 4.              Log into the second Nationwide account and set up a monthly standing order for £1,000 to the second TSB account. Set to the same date previously used.

Action 5.              Log into the second TSB account and set up a monthly standing order for £1,000 to the third Nationwide account. Set to the same date previously used.

Action 6.              Log into third Nationwide account and set up a monthly standing order for £1,000 to your main current account. Set to the same date previously used.

You should ensure all these transactions are set to occur on the same date to get the maximum amount of interest you can.

You have now completed the standing order arrangement stage of the process!

Time Scale – After you have received online banking information (within next 7 working days) the standing order set up will be approximately 5 minutes per account

 

Step 3 – Monitoring your accounts

When you have applied for the accounts and have ensured your standing order system is functioning, the process is complete.

An important step to take is then to ensure that the interest rate upon the account is monitored, this can be done by our free rate tracker service which will alert you if the rate changes upon your account, whether its a bonus period expiring or if the provider drops the interest rate.  It will also inform you if a more competitive account becomes available, so you can improve your returns further.

 

Things to remember

As long as the amount in each account remains below the Financial Service Compensation Scheme (FSCS) limit, your capital would be protected, even if the provider went out of business. The FSCS ensures cover for up to £85,000 per person, per banking license (or £170,000 for joint accounts). If you would like further information on the FSCS, please take a look at our guide.

Conclusion

From the information you supplied, there are a few options which you can use. If you want to ensure you are earning every penny possible from your savings, you could open multiple High Interest Current Accounts. This will ensure you are making your money work as hard as it possibly can. We anticipate the total time spent doing this to be 1 hour which will get you a return of £500 in the first year alone.

There are a number of terms and conditions that need to be satisfied to be eligible for these accounts, however by following our simple 3 step plan these should not pose too much of a problem.

Inertia is the single most factor that prevents savers from getting real returns on their savings. Once you have decided to get the best savings rates and you have found us, the rest is easy.  

Many thanks for your question,

Anna.

 

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