Safe Options for Saving Cash in a Low Interest Rate World
Updated: May 17, 2022
Whilst investing in stocks and shares and commodity equities have been a really interesting market for the last 2 to 3 years, and in particular they have been very positive throughout 2021, no one knows what will happen in 2022, and many readers want somewhere safe to hold their cash, and not lose it via investing.
We are now in a low interest rate environment, and whilst rates are likely to increase before too long, they won't go far enough for savers to earn a real return.
This means that people are earning either 0.1% on their savings or potentially 0% on their savings, which is not particularly good at all for long-term wealth generation.
In fact you are going to lose money in reality due to the current rate of inflation being nearer 10% in the US and 9% in the United Kingdom.
So where is the best place to put your cash savings in this low interest environment?
NS& I Premium Bonds
Well one area I like to consider is that of national savings and investments premium bonds. Premium bonds are effectively a prize draw that is run on the first of every month and they have over a million prizes each and every month that you can tap into.
The current interest rate or interest rate of the prize fund is in fact 1.1%, although in reality if you are only holding £100, £500 or even £1,000 of premium bonds in total, you are very unlikely to see any prize draw winnings, whereas is if you hold the full £50,000 limit which is the current maximum limit as of 2022, then for £50,000 you should receive on average about 1.5 wins per month, each and every month, so probably between 12 to 18 wins throughout the year.
However, it is fair to say that almost 99% of those wins will be of just £25 which is the lowest level of premium bond price we can currently win. In fact even the chance of winning a £50 prize or £100 prize is difficult as the odds become even longer for such prizes.
When we start talking about prizes that people get interested in, such as the £10,000 plus prizes, e.g. there are £10,000 £25,000 £50,000 £100,000, and of course the magic £1 million prizes which are paid out twice in a month, so those odds really are astronomical.
In fact the chance of winning any one of the two £1 million prizes is somewhere in the region of 45,000,000,000 to 1, so very long odds indeed, however most people appreciate the odds are long.
Premium bonds are a very popular saving device within the UK and millions upon millions of UK residents hold them, probably somewhere in the region of half the entire population or circa 30 million people.
And whilst the million pound prize is extremely unlikely it’s enough to tempt people into thinking "what if" each and every month, and the thoughts and dreams of having national savings and investments agent millionaire come knocking on your door is a dream that does tend to keep people invested even when the prize fund interest rate is as low as it is now at just 1.1%, and is at its historic lows throughout the last 50 or 60 years.
Another opportunity for Cash Savings
The standard go to option for savings is to simply put them in a bank, such as any one of the usual banks in the UK such as HSBC or NatWest or Barclays, & Virgin. They will all offer you a pittance in return for holding your money.
As I said before, it may even be zero because some banks really don’t want your cash at this time as they are well stocked from government handouts and from retaining dividend payments over the pandemic period, which means their balance sheets now have billions upon billions of pounds of spare cash, and so they simply don’t need to pay you and I any interest.
Due to the above lack of interest , is why some people have been using their spare cash to invest into stocks and shares, and whilst we all know this may be a good idea and that over the long term you are more likely to get a decent return from stocks and shares investing than holding cash or investing in the bank, some people just dont want to take that risk.
So whilst we would very much recommend that people are encouraged to take a long-term approach into stocks and shares investing and invest little and often to enjoy the benefits of pound cost averaging and also compound interest, which we will talk about in more details below, we do understand some people do not want to take the risk, which unfortunately means they will not be able to generate any sort of decent return right now....unless they win the £1m premium bond prize!
Explanation of Pound Cost Averaging
When share prices are high, your money buys fewer units, but when the prices are low you buy more units. The real benefit of this is so that you are prevented from investing at the very very peak of any market and therefore subject to a significant capital loss should the markets fall.
Of course if the markets continue to rise from when you would’ve initially put the money in, the overall effect is you would have bought fewer units with your money over that period and therefore pound cost averaging will have worked against you on this occasion, but it is in fact a hedge against losing money from investing at the wrong time, you can of course also be worse off by not putting all your money in at the initial stage of the investment. See full explanation of pound cost averaging here.