Why I got fed up with cash
Years of rubbish interest rates finally made me fed up with cash.
As a cautious soul, I was reluctant to risk losing my hard-earned savings on the stock market. Previously, I had never invested any of my own money in stocks and shares, apart from my pension and long-term savings for my children.
But when interest rates plummeted, I finally looked elsewhere.
Fed up with rock bottom interest rates
Any distant memories of when savings accounts paid reasonable rates?
Back when I opened my first cash individual savings account (Isa) in 2001, it paid a robust 5.65% interest a year. I topped up the account when I could, kept an eye on the interest, and moved banks occasionally chasing higher rates.
But then the credit crunch hit.
Within just over a year, the Bank of England slashed base rate from the dizzy heights of 5.75% at the end of 2007 to a miserly 0.5%. Since then, base rate has scraped along at record lows for more than 8 years.
The only movement has been a small bounce – down to 0.25% in August 2016, and back up to 0.5% in November 2017.
As savings rates toppled, I gritted my teeth and stuck with cash. I survived for a while by switching to an account fixed at a reasonable 4.15% for four years.
However, when that ended in 2014, my interest plummeted to 1.25%. I looked in vain for a better cash Isa.
Since then, rates have not improved. From 2016 to 2017, the average interest paid on cash Isas was just 0.89%, according to independent statisticians Moneyfacts.co.uk.
Keen to keep the benefits of an Isa
Searching for higher interest, I did find some accounts paying more than a pittance.
In today’s topsy turvy world, you can sometimes earn higher interest on current accounts than many savings accounts. Some regular savings accounts also pay better rates than elsewhere.
However, the higher interest may only be paid on limited amounts of money for limited time, with restrictions about minimum or maximum monthly payments and setting up direct debits.
I was also keen to keep the benefits of my Isa. Isas act as a barrier, shielding money so it can grow untouched by the tax man.
Sure, I could spread my savings between different current accounts. The new Personal Savings Allowance, introduced in April 2016, means basic rate taxpayers can earn £1,000 a year in interest without paying any tax. Even higher rate taxpayers can earn £500 interest a year tax-free.
But if I earn more interest than the Personal Savings Allowance, I’ll have to pay tax on the extra – something I can avoid by keeping my money in an Isa.
Fed up with inflation
I was also concerned that cash wasn’t actually a safe option, but a sure route to losing money.
Currently inflation is running distinctly higher than interest rates. That means inflation is eating away at the value of my savings faster than I can earn interest.
For example, imagine that I am both very thirsty and have a serious dairy habit. Today, with £100 I can buy 100 big bottles of milk for £1 each. But next year, with inflation around 3%, that milk could cost £1.03 a bottle.
Even if my £100 savings grows to £101 with 1% interest, it will still only be able to buy 98 bottles of more expensive milk. The killer combination of low interest and higher inflation means that my money will buy less next year than it can right now.
Keen to find higher returns
Low interest rates may be fantastic for borrowers, but bad news for sensible savers trying to provide for their future.
I am not alone in facing rubbish rates on my savings. Out of the UK household’s total wealth of around £1.4 trillion, more than half – £729 billion – is sitting in cash, according to research by Janus Henderson conducted in June 2015. Half of that cash is sitting in instant access savings accounts, earning a tiny 0.4% interest.
With rates so low, switching savings accounts to earn a few pounds extra can seem more trouble than it’s worth. Around 85% of the instant access savers identified by Janus Henderson haven’t switched accounts in the last three years.
Faced with derisory interest rates and rising inflation, I decided to look elsewhere to make the most of my money. When interest rates were higher, I was willing to stick with cash. But now I was prepared to take some risk, and try investing in the hope of higher returns.
As a journalist writing about personal finance, I was all too aware that the value of investments can fall as well as rise, and I might get back less than I originally invested.
Yet history has demonstrated that investing over the long term holds the possibility of both capital growth and dividend. Finally, I was willing to invest my own money to find out.
Faith Archer is an award-winning personal finance journalist and also a money blogger at Much More With Less