Money Insider: A balanced way to earn money from a £5,000 savings portfolio
Saturday 29 May 2010
A balanced savings portfolio ticks all the boxes. With interest rates offering miserable returns, it's understandable that some people may have all but given up saving in the current climate.
However, building a savings nest egg remains a sensible strategy even when interest rates are low. So if you've got £5,000 to save, where should you put it?
First, it's important to keep some of your cash in an easy access account for emergencies – somewhere that you can get your hands on it quickly if needed.
At the same time you should look to take advantage of your annual taxfree savings allowance, so it may be that you initially keep your emergency fund in an instant access Isa and kill two birds with one stone. The Golden Isa 2 from Barclays paying 3.10 per cent (ends 1 June) or Nationwide Building Society e-Isa at 2.75 per cent free of tax are worth considering as a home for the first £1,000 of your savings, giving you instant penaltyfree access when you need it.
The next step for the remainder of your savings is to look longer-term with fixed rate accounts – more often referred to as bonds. Because you don't have access to your cash for the term of the bond (anything from six months to five years) the trade-off is that you receive a higher rate of interest than you'd get with an easy access savings account. However,while you don't have access to your capital, many bonds will give you an option to receive the interest on a monthly basis if that's what you prefer.
Once again you're faced with more choices and decisions to make. Interest rates on fixed-rate bonds have fallen slightly in the last few months. However, the biggest dilemma is how long to invest your money for. The temptation is to opt for the highest rate, although this would result in you having no access to your money for a full five years. With base rate still at a record low of 0.50 per cent, rates will start to rise again at some point, but what we don't know is quite how soon and how quickly this will happen.
The rates on offer for two- or threeyear bonds look quite attractive, and although you can currently bag an extra 0.75 per cent for a five-year fix, that decision may come back to haunt you if rates were to rise by say 1 or 2 percentage points in a couple of years from now.
So with the remaining £4,000 of your savings, if you're positive that won't need to use it for some time, you could divide it as follows:
* £1,000 with Kent Reliance BS for a one-year term at 3 per cent;
* £1,500 with State Bank of India for two years at 4 per cent;
* £1,500 with Coventry BS for three years at 4.2 per cent.
By spreading your fixed-term savings, you will get a better overall return than by just putting it all in a bond for just one year. This strategy also means that every year for the next three years you will have a savings bond maturing and the option to fix again, perhaps in a new fixed rate Isa, for a term that suits your circumstances at that time.
In the meantime, if you want to continue building your savings, take a look at the new branch-based regular savings account from Northern Rock. The account allows you to save up to £250 per month, gives you penaltyfree access to your cash and pays a table-topping 5 per cent gross fixed for 12 months.
This suggested savings portfolio may not be the right scenario for all savers as it will depend on your own tax status, the amount you have to save and access you require to your cash, but it's a pretty good base from which to start.
Premature end for Child Trust Fund
While there was undoubtedly an urgent need to reduce the budget deficit, the seemingly hurried decision to scrap the Child Trust Fund this week has to be questioned.
The £520m annual cost saving may earn the Government a few brownie points with some supporters. However, it was a shortsighted move to axe a savings scheme that could have given such a vital financial boost to the next generation.
If the CTF had been introduced in 1992, those with a CTF maturing this year would be able to use their lump sum to offset the rising cost of higher education or even put it towards that now seemingly impossible deposit required for their first home.
Had the scheme been allowed to continue, come September 2020 when the first accounts would have matured, there would have been a stream of 18-year-olds entering adult life on a much sounder financial footing than previous generations – did it really make economic sense to wipe that out in one fell swoop?
Andrew Hagger is a money analyst at Moneynet.co.uk.
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