8 Questions on Cash
1 – How much cash should I hold?
Six months expenditure is a sensible starting point; if you plan to buy big-ticket items such as a car or holiday or second property, then you should keep that money in cash. Holding cash that you don't plan to spend in the medium to long term may not be the best decision?
2 – How does inflation affect my cash savings?
Over the last ten years, inflation has averaged around 2% per annum with the average bank account paying interest of just 0.50% per annum. The effect this has on a £100,000 deposit means your spending power is eroded by £1500 per year in real terms. Over ten years, the compound loss would be £16,785. Of course, you don't see this when you look at your account because the numbers will increase slightly; however, you have to question a long-term plan that considers spending power being eroded year-on-year.
3 – Are Premium Bonds and National Savings Offering a Competitive Return?
As stated above, National Savings products offer a high-security level; however, the average price or return for Premium Bonds as at December 2020 is 1%. As it is the average, some people will not even get 1%, though a few will, of course, get more. Of course the more Premium Bonds you hold, the more likely you're are to win, and if you hold the maximum amount of £50,000, there is a strong likelihood you would beat a savings account paying 0.5% per annum. Often premium bonds feel like they are doing better than they really are as you are contacted if you win, which feels nice but if you work out what the year of winnings equates to as a return, you may be disappointed. It is also worth noting that from 24 March 2020, the interest on Income Bonds and Investment Accounts dropped to 0.01%.
4 – What are the benefits of National Savings?
National savings offer a broad range of products that provide a high level of security; they will protect any amount you invest with them. They are backed by the government and therefore can offer more than the standard £85,000 provided by the Financial Services Compensation scheme. So if you do have to hold large sums of cash, National Savings is worth considering.
5 - Is My Cash Safe?
We have already mentioned that the government backs National Savings, so all your money is safe with no upper limit. Saving and current accounts with UK authorised banks are protected by the Financial Services Compensation Scheme (FSCS), which offer £85,000 per individual or £170,000 jointly per banking licence. It is worth noting that many banks share banking licences, for instance, First Direct and HSBC share a licence so if an individual had £50,000 with both HSBC and First Direct they would be only protected up to £85,000. Full details of the FSCS scheme can be found here - https://www.fscs.org.uk/
6 – Should I Have More Than One Bank Account?
Having more than one bank account is sensible as you can avoid issues should one bank have technical problems you will still be able to access cash at another bank. As highlighted above, try and have it with another bank that does not share a banking licence or possibly the same technology or infrastructure. On the flipside try to avoid having opening lots of accounts as they only become difficult to administer over time. It is not uncommon to find clients with large numbers of accounts after rate chasing, which increasingly become a burden as time goes on.
7 – What Are The Alternatives To Cash?
At Octagon, we believe in constructing a robust plan and then sticking to it. Once you have set aside enough cash for an emergency fund and any planned expenditure you either have to decide to remain in cash and probably not keep pace with inflation, or commit to investing in a well-diversified investment portfolio for a minimum of at least five years. Considering other assets such as gold would not be sticking to a plan and purely speculating on one asset class which we would not recommend.
8 – Should I Keep Moving My Money to the Best Rate?
There is certainly no harm periodically checking your interest rate and considering an alternative. However, we would advise you not to let interest rates rule your life. It is unlikely that continually having the best rate available will make a significant difference to your wealth and focus instead on your financial plan and enjoying your life.
This article does not constitute advice. Anyone considering any form of financial planning should seek independent financial advice. Octagon Consultancy Limited is authorised and regulated by the Financial Conduct Authority (FCA). You should note that the FCA does not regulate tax advice. Past performance is not indicative of future results. The value of your investment may go down as well as up.