Our personal finance columnist, Mitch Hopkinson, looks at ways in which people can make their money work harder for them, at a time when record low interest rates mean keeping large deposits of cash is no longer a viable option in order to maximise funds.
Mitch, a recipient of the ‘Financial Times Independent Financial Adviser of the Year Award’, is Head of East Midlands at deVere United Kingdom, the UK division of deVere Group, one of the world’s largest independent financial advisory organisations.
Interest rates are running at really low levels, is anyone interested in making their money work harder?
If you are, here are some top tips for making your money work for you.
1.First of all do get interested in the amount of interest your money makes. Banks and Building Societies prey on apathy. Remember, statistics say that someone is more likely to get divorced than change their bank account. People who take a keen interest in their money will shop around to get the best deal. Make sure you do too.
2.The next thing to do is to ask yourself how much money you really need to keep in cash. Historically cash has always been a very poor investment over the long term as it often struggles to keep pace with inflation. You should not keep any more in your instant access account than you might need to have to cover bills and any unforeseen emergencies. For most people that means having no more than a few months’ worth of your monthly outgoings held in easily accessible cash. If you are holding more than this, then you ought to think about opening up a notice account or investing in a term deposit. This way you should earn a little more interest.
3.Don’t delay making decisions with regard to your cash even though you might expect interest rates to go up. The trouble is, we do not know when this may be and the increase will probably be a lot less than most people anticipate. The current base rate is 0.5%, and most people now think that this will not alter until next year; some saying this may not be until the second quarter of 2015. That is still quite some time away. It probably makes sense to look at a one year fixed rate. If you shop around you could get 1.95% or slightly over 2% if you can leave your money for 15-18 months. You may not recognise some of the names, but so long as you do not invest more than £85,000 you should find that you are covered by the UK Government in the event that the bank/building society you have the deposit with goes bust.
4.There are some other ways that you could make your cash work harder for you. This would entail you having the ability to tie your money up for five or six years. If you are able to do this and do not mind taking the risk that you may not get any interest then you should get some advice upon whether a deposit based structured deposit is appropriate. This will give you the potential to earn 5% or slightly more and so long as you keep your investment within the £85,000 limit of protection on deposits (this is the government protection scheme I mentioned above), then this really is a quite compelling option. These innovative products can either pay you an annual amount of interest or will pay a defined level of interest if on the anniversary of your investment the FTSE 100 is higher than when you originally put your money in.
5.If you have a mortgage, now be a really great time to look at fixing your mortgage rate. Most UK lenders, in an effort to repair their balance sheets and build capital, have increased their standard variable mortgage rate. The average of five of the top UK mortgage lenders by volume lending (Nat West, Woolwich, Santander, Nationwide and Halifax) shows a figure of 4.14%. On a £250,000 capital and interest mortgage over 25 years this produces a monthly mortgage payment of £1,338. With a 1% increase this figure moves to £1,481 and a 2% increase results in a figure of £1,632.
The average two year fixed rate of the same lenders is 2.85%. The saving made over 2 years by re-mortgaging from the variable rate at 4.14% to the fixed rate at 2.85% is £4,128. With a 1% increase on the standard variable, this saving rises to £7,560 and at 2% the total saving would be a substantial £11,184.
6.If you have any expensive debt, make sure that you pay it off. Paying over 15% for your credit card is abhorrent. Check the rates you pay on all cards and don’t pay these rates, a longer term loan will almost certainly be better for you.
Mitch Hopkinson is a managing partner of deVere United Kingdom, part of the deVere Group, one of the world’s largest independent advisers of specialist global financial solutions to international, local mass affluent, and high-net-worth clients, through a network of 70 offices across the world and more than 1,200 staff. It has in excess of 80,000 clients and $10bn under advisement.