3 ways to boost your money before Xmas
By Peter Kent | Tue 21 Oct 14
By Peter Kent | Tue 21 Oct 14
We all want a good return on our money, but the days of receiving healthy interest rates on our hard earned nest eggs seem like a distant memory, and a return that even comes close to the 1.2% rate of inflation can occasionally seem beyond the dreams of avarice.
This is hardly surprising. The policy of quantitative easing (QE) has flooded the financial system with cheap credit, meaning banks are less inclined to pay a good rate of return. The theory is that this incentivises us all to spend, spend, spend, and for the most part, it appears to be working.
But savers are still, seemingly left out in the cold, being given pitifully low interest rates. These are called zombie accounts, and at RateSetter we set about highlighting this problem earlier this year (you may have seen zombies running around central London!). But as well as informing people this phenomenon exists, we also want to do our bit in advising people on what they can do to avoid it. So below, is a quick guide on some of the options available to you.
1. Stocks and Shares
You don't have to be Gordon Gekko to buy stocks and shares, but it might be worth taking note of what happens at the end of that film. If you haven't seen it, Mr Gekko is a notoriously cruel and ruthless investor in the 80's, who is brought down thanks to an ingenious young trader, the films protagonist. The message to be taken from this being, value can go up as well as down. But, you should not be scared of putting cash in to shares, as they are an excellent way of getting a good return on your cash.
A recent high profile example of the kind of returns that can be made is of course, Royal Mail. Since their flotation their value has rocketed by 81%, earning those who invested an astonishing return. However, most shares don't make anywhere near this, and to get a good return you will need to be invested for the long term and accept the risks that come with it.
Big companies like BP, RBS, Lloyds and Barclays have traditionally always been seen as good, safe investments. For this reason, billions of pounds of our own pensions are invested in these companies because :
Of course, you should never put all your nest eggs in one basket, and if you do want to buy shares, get yourself a good share account, make sure they are all in an tax efficient ISA and diversify your portfolio to mitigate the risk.
The rule of thumb with risk is, the greater the risk the greater the return. If you are careful you can get a healthy return from stocks and shares, but it requires a lot of management as well as a good bit of reading to pick the best stocks, and a bit of practice using your account before you can really get in to it (for example setting a sell out price etc). Do have a go if you have the time, but start small and be vigilant.
2. Introductory offers
Introductory offers or more commonly termed "teasers" are used in many sectors from mobile phone and utility companies to broadband providers and of course traditional banks. They provide a positive initial offering but beware the dramatic drop after a certain period. If you have the time and vigilance to keep track of offer periods and actively switch before they end you can take advantage of these offers. The reality is most of us don't which is why teasers are not for the average saver.
Teaser rates are offered by banks to entice you to move your money. This is fine for the first year, and the likelihood is you will be able to get a rate that holds your saving's value. Most also allow you fairly easy access to your cash, typically this means you can have three or so withdrawals a year, without it affecting your rate. So if all you want is for your cash to tread water at around the rate of inflation, then this is for you.
Teaser rates are the main cause of zombie accounts. If you do get a good rate from a teaser, this will end after a fixed term (typically 12 months) at which point your rate will nose dive.
With a teaser from one of the major banks, the risk of you losing your cash entirely is effectively 0%. Due to the Government's Financial Services Compensation Scheme (FSCS) which covers sums up to £85,000, no matter what happens. The risk however with teasers is forgetfulness and being stung by the standard rate after the initial offer has expired. Whilst your cash will not be swallowed by free falling stocks, if you don't constantly switch accounts your money will lose value, so it is only safe up to a point.
3. Peer-to-peer lending
A relatively new concept called peer-to-peer lending offers returns of more
than 6 per cent and is understandably fast growing in popularity. By cutting out the banks peer-to-peer lenders can pass savings directly to the customers.
The potential returns from P2P are far superior to the derisory savings rates paid by banks. Not to mention their focus on customer service that is a lesson to the traditional players on the high street. The products are fairly straight forward and in the case of RateSetter, the leading UK platform, there are no teaser rates or hidden fees.
Although rates are far in excess of what you can get elsewhere you need to be aware of the potential risks. Unlike traditional savings accounts these products are not covered by the FSCS although several P2P lenders have their own schemes that compensate lenders for any defaults. It is recommended you understand the scope of such provisions and the level of risk involved.
Depending on the platform you use there are different levels of risk. Be sure to look for one that provides a provision fund that protects your money from potential defaults and has a track record of returning lender funds. It is also important to choose a company that maintains strict credit checking procedures and keeps defaults at a minimum.
It's important to note the above article is the opinion of one member of staff at RateSetter and by no means should it be considered financial advice. If you would like financial advice, it's best to speak to an independent financial advisor.
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