Aug 12

5 golden rules for safer savings

Reading Time: 5 mins

After bank collapses, bailouts,  the recession and the small matter of global market turmoil it’s no wonder we’re all still worried about the safety of our money. Despite all the problems the global economies are experiencing, there are steps you can take to protect your hard-earned cash.

See how you can protect your money with these five golden rules for safer savings…

  1. Protect yourself from crashes
  2. Put your money in the safest place
  3. Think long term
  4. Find alternatives to banks
  5. Beat inflation
Golden Rules

Rule 1: Never save more than £85,000 in any one financial institution at a time

safer savingsAt the moment, the Financial Services Compensation Scheme (FSCS) covers up to £85,000 of your savings for each financial institution. So if you only have up to £85,000 in one bank at one time, even if the bank goes bust, you’ll get your money back. You just might have to wait a while to get it.

However, any amounts above £85,000 (£170,000 for joint accounts) will be lost. Which means you need to spread your investments.

Don’t be caught out – if two banks function under the same banking licence you’re only protected for up to £85,000 between the two institutions.

So, for example, you may think that Halifax and Bank of Scotland are two separate banks. But they’re actually both part of the HBOS group and function under one banking licence. So the Financial Services Compensation Scheme would only cover £85,000 across the two banks.

It’s often quite complex working out which organisations come under the same banking licence so to make sure you aren’t going over your allowance, have a look at Moneyfacts to see who owns what!

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Rule 2: The safest investments are government owned

We bailed them out at the height of the recession, making them state owned and at the same time ironically making them one of the safest places to put your money. Obviously government-backed institutions are very unlikely to fail, as it would take the government going bankrupt for them to be in trouble.

So your money is pretty much as safe as it can be in one of these banks, but remember that doesn’t necessarily mean they offer the best interest rates, so you have to weigh up the importance of peace of mind versus a good return on your savings.

A bank that’s ultra-safe is therefore National Savings & Investments, which is wholly government owned. RBS is partly government owned.

Government bonds (called ‘gilts’) are also very safe. But, for the comfort of knowing your money is safe, you’ll have to take an interest-rate cut. In fact, these institutions are now actually trying to put investors off by lowering their own rates. So you won’t get the best deal, but you will have peace of mind. Read our article for more information on how to invest in gilts.

Rule 3: Think long term when it comes to the stock market

The stock market is highly volatile. Of course, the markets are particularly edgy at the moment because of the financial problems in the eurozone and around the world, but even in good times they go up and down. Which is why, if you want to get a good return from stock market investments, you need to be in it for the long haul.

Over a long period of time the stock market moves on a general upward trend. So even if the market fluctuates in the short-term, over the long-term you’ll see a much better annual return on your money than from cash savings.

Jasmine says...

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Take a look at this guide on the best share tips of 2013, or this one on investment trusts. They’re both completely FREE!

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Rule 4: Remember to consider savings alternatives

Putting your hard-earned cash in a conventional savings account at your bank isn’t your only option. You could also consider:

  • Credit unions

These are local savings institutions which are run for different communities – for instance for those living in the same area, or for those with a particular job (like the Police Credit Union), or part of a trade union.

Because they’re non-profit organisations – i.e. there are no third-party shareholders making money from the organisation – credit unions are mutually beneficial for all their members, often offering competitive borrowing and savings rates and making them arguably less risky than banks. And if you save with a credit union, you’re directly helping someone else who needs to borrow money.

Zopa is an online ‘social lending’ service – essentially it cuts out the middleman, i.e. the banks – by letting people borrow and lend to and from one another at a rate they agree.

What this means is that savers get a better return on their investments than with a conventional savings account, and those borrwing money are able to do some more cheaply than they could with a bank.

As a saver you can offer to lend your money out at a rate you choose, and you can also select the type of people you lend to. Zopa categorises its borrowers by credit rating, so you can decide how much risk you want to take on – those with a better rating are obviously less risky, but also demand the best rates, so won’t make you as much money as a more risky borrower.

You can also spread the risk by dividing your money in smaller chunks across several different lenders.

Read more about Zopa in our article here.

The moneymagpie savings account calculator

the moneymagpie savings accounts comparison tool

Rule 5: Make sure you’re beating inflation

This is easier said than done at the moment, as inflation is sky high. What that means is that if you save money in an account which offers a rate of interest lower than that of inflation (currently around 3%) – which unfortunately is almost all of them at the moment – over time your savings are being eroded and the purchasing power of your money is decreasing.

There are a few options to consider, however. As mentioned above Zopa often beats conventional banks savings rates, and promises lenders an average annual return of 4.4%.

There are also inflation-linked bonds, whose interest rates change in line with inflation. You can find out more about those here. Corporate bonds are also a good option – see our full article on them here.

Always Remember

It’s important to check your credit rating from time to time. We all sometimes go to the doctor’s to check that nothing is wrong – but when did you last have a financial health check?

The worse your credit rating, the harder it is to get approved for the best bank accounts and credit cards (not to mention loans, phone contracts and many other things).

You can check your credit report for FREE here. It’s an easy way to check that all the information held on you is correct, and help find out what may be dragging your rating down.

Improve your finances today – get your FREE Experian credit report here.

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