Where Does It Go? – UK Money Blog £

With the low interest rates at the moment, its been really hard finding a good enough account to save, with Barclays offering a paltry 0.5% on my savings I was looking for a better deal.

It was whilst I was walking down the high street I noticed several banks offering “6% savings” which all happened to be part of the Santander group – enquiring within one, Alliance & Leciester, it seems for the moment all the banks are still operating under separate licences but offering similar deals. The 6% account comes with a catch – you need to invest £500 a month (£1000 a month with Abbey) and the limit is £2500. However, there is nothing stopping you opening up several accounts to take advantage of the deals at each and transferring the required minimum each month via an elaborate system of standing orders. The practice reminds me a lot of Stoozing where similar balances transfers are carried out by credit card 0% chasers.

If you have used up your cash ISA for this year, you may consider it (since ISA’s are offering only about 2.85% net at the moment) – you could probably invest around £7500 over three accounts, for a yearly return of around £450.

Whatever happens, I am avoiding long term bonds since I’m guessing interests rates will go up in the next few years – they simply can’t get any lower and that debt is ever increasing.

At the moment how to spend £10,000 from say inheritance or another windfall is a surprisingly hard question. The classic answers such as ISAs, property or shares have all taken a pounding in these last few months.

ISAs

These are tax free accounts which typically have high rates of interest to encourage you to put the money away for 12 months. At the moment these are looking around the 3.5% mark, if you leave it in for a year. If you draw out the money in the 12 months, a lot of accounts will only pay you around 1% on your money.

This is not just a low rate, you could actually lose money in real terms – with inflation running at 3.2% any money put aside not earning any interest will devalue that amount.

Inflation figures April 2009

Taking inflation into account your 3.5% ISA could in fact only be getting 0.3% a year in real terms! On £10,000, you would earn a paltry £30.

This would be better than leaving it under the mattress though, but only just! Its all to do with the government trying to encourage you to spend your money on goods to help kick start the economy.

Property

For so long the easy option if you had the money, property prices have plummeted over the last 12 months, with some predictions saying houses will lose 50% from their peak. Even if the house price crash had never happened £10,000 wasn’t enough for a sensible deposit if you wanted to stay away from the 100% mortgages (which with the hindsight of history would have been a GOOD thing).

Suffice to say, if you can buy at the moment you may pick up some bargains compared to recent years, but don’t expect your property to be sold for profit for a good few years, maybe even 10 years. This will probably mean you buy to live in the house, which is really what buying a house should primarily be for; the culture of get-rick-quick by investing in property must be held accountable for half the trouble of what we’re in at the moment.

Shares

If property prices are bad, then shares are an even more tragic affair. The FTSE which tracks the 100 best performing companies in the UK has crashed from peaks of 6500 to around 4000 today, and no one knows if that is the end of it. Saying that there are some shares thatt have bucked the trend, so if you’re a financial wizard or someone who knows something every other share trader doesn’t, you may still have a chance to make some money, especially if you manage to buy a stock at a current low and it soars upwards over the next few years – but with the current climate that £10,000 invested could equally end up as £0 once the company goes bust.

A good overview of shares verses house prices over the last 20 years is found at Fool’s new site, LoveMoney, which states:

If I were to summarise these results, I would say that both asset classes have produced useful returns for investors since 1984, with shares winning by a nose. However, the FTSE 100 is considerably more volatile than house prices, so investors in shares need to be patient in order to ride out the fairly frequent setbacks which the stock market springs on us.

So, all being told, where would my £10,000 go?

• I’d concentrate on clearing all debt, thats a no-brainer these days. Why pay 7+% on a loan if any saved money is only getting 0.3%?
• Buy anything you’ve been thinking of getting for a while, taking advantage of the temporary 15% VAT (and also do your bit to save the country from financial Armageddon)
• Look to invest in people or business – if you’ve got a good idea, now may be the perfect time to lend money to an idea you think will succeed, since banks are being so tight with their money.
• Buy things that will increase in value over time – antiques? Limited edition items? Art?
• Go on that holiday trip of a lifetime. May as well enjoy the world in a cheaper country whilst you have the chance.
• If you have a mortgage, try and overpay as much as possible for when those interest rates will rocket up in the future

Those are my suggestions, if you have any other bright ideas, feel free to say underneath – I think we could all do with some!

Guest Post from What About Money? a website run by the FSA of the UK to help 16-24 year olds understand money.

Savings and investments

In our grandparents’ generation, saving a good chunk of each pay packet was standard practice – and the reason why was very simple. In those days, there were no such things as credit cards or store cards. And personal loans and bank overdrafts were not normally available to the average man on the street. This meant that if you wanted to make a large purchase, such as furniture or even a motor car, there would only be one way to do it – save.

Saving: A timeless habit

But despite the borrowing options open to the over 18s today, saving is still the best way to buy anything you need. Not only do you stay out of a debt (which means you won’t have to pay interest), but by saving you can earn interest instead on your money making you richer still.

Even if you are not saving for anything in particular, putting money aside each month – even if it’s just £10 or £20 – is a great habit to get into. Having a little bit of cash to fall back on gives you choices and freedom.

But stashing your cash under your mattress, or even in your every day current account, is no good as you won’t be earning interest on it. Instead put your money into the right savings account.

Where should I save?

As soon as you hit 16, you will have to save in an adult’s account where, unlike a child’s account, tax is payable on any interest you earn. However, the tax man does allow every resident adult in the UK to save a certain amount tax-free in what’s called an ISA (Individual Savings Account).

For this tax year (to April 2009), the amount you are allowed to save before you have to pay tax on interest is £3,600. For this reason, an ISA is always the first place to start saving. But make sure you find an account that pays the best rate of interest by doing some research online first.

What’s best for you?

If you are lucky enough (or just work hard enough) to have more than £3,600 each year to put aside, it’s time to look at other kinds of savings accounts. A regular saver with instant access to your funds is the most straightforward – though it may not pay the best rates of interest, especially if you do not save the minimum required per month.

If you don’t want access to your money for a year or two, fixed rate bonds tend to pay better rates of interest. But if you change your mind and withdraw your money during the term of the deal, the interest earned could be wiped out entirely.

You may also prefer to use an online savings account but – especially if you are already prone to internet spending – bear in mind just a click of a mouse could undo all your hard work.

Most people never have to worry about this but if the bank or building society you are saving with goes bust, the Financial Services Compensation Scheme (FSCS) will protect the first £50,000.

Investing on the stock market

When it comes to money management, saving is always the best place to start. But while the process is rewarding, it is slow and steady too. That’s why, in addition to their savings, some people choose invest the money. Essentially, investing is saving for the long term (usually over five years) but with the hope of getting a better return..

You can invest in different ways, for example buying shares in companies. But there are other options such as property and fixed interest investments (these are where you loan money to companies or the government and you get interest in return). But investing is a complicated process and novice investors usually don’t pick these investments themselves.

Instead they invest in a fund, like a unit trust, that pools your money with other investors and spreads it out in different areas on the stock market. The fund could invest just in shares, sometimes focusing on specific sectors such as large UK or European companies. In addition to funds that invest in shares, some focus on property or fixed interest whilst others may spread across all three types. But the detail is left to a fund manager whose job it is to literally manage everyone’s money.

Depending on this fund manager’s choices, and the state of the markets in general, the value of your investment can go up and down. But, as you would expect, the service is not free. The fund manager will charge a percentage of the market value of the fund every year.

If you find that you get the hang of the markets, you can even ‘stock pick’ yourself. But, to use a familiar phrase, you’ll have to do your homework first.

There are various places you can review internet banks to see which will be best for your needs.