Making the Most of High Interest Savings

Making the Most of High Interest Savings

by Rebecca Hall on 15 Feb, 2011

In the current climate there is arguably no such thing as ‘high interest savings’. Interest rates are generally so low that it’s a battle to get a rate above inflation. As such, it is possibly more important than ever to be a savvy saver.

Naturally, your options are limited by the amount of money you have available, and how much access you need to it. It’s always been the case that the longer you can lock your money away for, the higher the interest you can obtain, and doing so is a large part of making the most of ‘high interest savings’.

However, it’s a double edged sword. Even if you can afford to keep your money locked away for 3-5 years, whether you should or not is a different question. Yes, it will enable you to get an inflation beating interest rate, but once the base rate increases (which it inevitably will) you could well find yourself ruing the day you ever committed to such a low rate.

Equally, unless you do commit to such a long term, you certainly won’t be getting anything like ‘high interest savings’. The best idea could well be to spread your money around.

How best to do it? There is no failsafe method, and it depends what your priorities are, but a few sums and projections will be required.

Aim to get the optimum balance between flexibility and interest. The minimum aim should be to earn enough interest to match the current inflation rate across your savings, whilst leaving enough in short term savings so they can be moved when the base rate increases.

For example, if you have £50,000 and have identified accounts that will yield 5% on a 5 year fixed term and 3% on a 1 year fixed term, and the current inflation rate is 3.75%, putting £20,000 into the 5% account and £30,000 into the 3% account will work out as roughly equivalent to the inflation rate.

Working out this zero point, you can then adjust the mix depending on your priorities, and how much you’re willing to sacrifice for the sake of interest or flexibility.

About the Author

Rebecca Hall

Rebecca Hall worked as an independent mortgage adviser for 10 years before turning to financial journalism full time. She has strong links to the CAB advising families on mortgage refinancing.