Survival Guide for Saver\\\'s in the Low Interest Rate Era
Since the credit crunch interest rates have been cut across the board and while that is good news for borrowers, savers are posed with the problem of how to secure a good rate of interest for their hard earned savings. Many will just leave it in the bank where it is and accept what they get, but if you are smart you will shop around to find the best deals available. If you are smarter still you will seek new ways of getting the best returns. This article aims to give you some imaginative ideas you may not have thought of.
The holy trinity of investing
The first thing to appreciate about savings is that there are 3 features to any investment you may make. These are-
In any investment, which includes earning interest in a bank, you cannot benefit from all 3 of the above elements. There is nowhere in the world you can put your cash which will give you immediate access, complete security and the highest rates of interest. You can however, have 2 out of 3. So if you want high interest then you will need to either compromise accessibility or take a higher risk.
If you are prepared to accept not having easy availability to your money then you could consider a limited access savings account. There is a whole range of these products available spanning from 90 day access to ones that tie-up your savings for a year or more. In general the longer you tie in, the greater the interest rate. Mostly you can actually get at your money if you need it but you forfeit the interest accrued if you do this before the end of the tie-in period. If your interested in this kind of saving make sure you work out very carefully what cash you will need over this period so you won't need to face this forfeit.
Ever heard of bonds?
If you are prepared to forgo a little bit of accessibility and are willing to take a little bit more of a risk than having your money in a bank then consider government bonds. When a national government needs to raise money it often does so by issuing government bonds. You can buy these through a broker or your bank. The bonds pay a fixed interest rate which is generally higher than that you could get from a bank. They are regarded as being very safe investments because governments rarely go bust and they can always raise taxes to pay off debts.
If you're looking for a higher rate still with a little bit more risk but aren't prepared to go the whole hog and put your money on the stock market how what about corporate bonds? Corporate bonds are also debt obligations issued by corporations in the same way that government bonds are. The corporation promises to repay the loan at a specified future date and makes regular interest payments to you at a fixed rate. Corporations are more likely to get into trouble than governments but if you choose well a large profitable company or spread the risk over a few then you should be pretty safe.
Next stop - mutual funds
If the stock market still feels too risky for you but you want to get returns higher than you would with bonds then a mutual fund may be the answer for you. A mutual fund, sometimes known as a unit trust or an investment trust, is a collection of stocks, bonds and other financial instruments that are bundled into one fund. It is controlled by a fund manager who buys and sells items to keep the fund maximizing its profits. Mutual funds are considered safer than stocks because the risk is spread. Different funds are also rated with different levels of risk depending on how cautious or aggressive the fund manager is. The yields however are lower than stocks because the fund manager needs to take his cut. Access is not so easy with many of these as there can be a fee when you buy in.
Now let's brainstorm
If none of the ideas above appeal then here is a splash of ideas to make the best of your money.
Investing in objects
Investing in you
Investing in your family and friends
Invest in your future
If you were to ask just about any financial advisor to give a one word piece of advice about investing it would surely be 'diversify;' which means don't put all your eggs in one basket. If you like any of the ideas above then try and mix it up a bit. Remember, even governments do very occasionally default on debt and banks can go bust as we now know.
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ABOUT THE AUTHOR
Fred Street is the author of many finance sites giving advice on all aspects of money. For more information visit http://www.financialspread.org.uk