Making the most of pitiful savings rates

We are not exactly living in times where having money in the bank gives you anything back, other than some form of personal security. Most savings accounts, whether they be individual savings accounts (ISAs) or easy access savings, are offering mediocre savings rates of around 1%, which for the most part, has been, and will continue to be, less than inflation.

Inflation is important to understand as it degrades the buying power of your money. Essentially if inflation is at, say, 2%, and you have £100 in your pocket now, in a years time that same £100 will only buy the equivalent of £98 worth of todays stuff. Or put differently, if an expensive loaf of bread costs £100 today, to buy that same loaf of bread in year at 2% inflation will require you to put away £102 of todays money. The point is that inflation attacks the buying power of your savings, so you need to beat it.

Fundamentally, beating inflation means growing your money faster than the rate of inflation. Believe it or not, it is possible to stay ahead of inflation even in these difficult times, and particularly even if you have small sums of money. The secret is to use the wealth of offers banks offer you for current accounts. 

Banks want your business, but are offering poor savings rates when you only want a savings account in isolation. But if the bank can get a regular movement of money through them, from you, you can get access to better options. It is interesting because I have recently been reading Money by John Murray where he talks about the Wealthy making money by keeping their money moving. This in principle is what I am talking about on a smaller scale, but let me explain with an example.

Inflation was about 1.5% in March 2020. The best easy access savings account on offer gives 1.16% interest (from NS&I) or if you want to fix and lose access to your money for 3 or four years you can get closer to 1.4%. On both accounts, inflation means you are LOSING VALUE in your money. However if you were to setup a new Nationwide Flex Direct current account, and pay in £1000 per month, you get access to 2% savings interest on balances of up to £1500. So you can GAIN VALUE on your money. In practice this works by putting £1500 into your Flex Direct account and leaving it there, but each month paying an additional £1000 in, but then paying it back out to where it originally came from. This still counts as paying in £1000 despite that money not actually staying in the account, and is known as cycling your money. The principle of keeping money moving works! Even better if you do not have £1000 to cycle every month is that Virgin offer a 2% on £1000 current account that has NO monthly pay in requirement. So open the current account, put your £1000 in, and be comfortable knowing that you are beating inflation and gaining value on your money.

Here we are dealing with relatively small sums that will not make you rich, but are accessible to most, and can help keep your emergency cash or easy access cash, growing against inflation. 

Next time I will talk about some techniques to take advantage of regular savings accounts to beat inflation too.