Are interest rates going negative?
There’s been a lot of talk lately about the possibility of negative interest rates in the UK. This isn’t something that we’ve needed to contend with in the past, so what does it all mean?
What are negative interest rates?
By placing money into a savings account, you’re effectively lending money to a bank for which they will pay you a rate of interest in return.
Since the Global Financial Crisis in 2008, however, those interest rates have been pretty low, but many seem to take the view that something is better than nothing.
But if the Bank of England decides to pursue a negative interest rate strategy, instead of paying you interest, banks may decide to charge you for the pleasure of holding your money.
The intended consequence of this policy to encourage people to spend more and banks to lend more. In turn, this should lead to an increase in consumption and investment, which would provide a much needed boost to the economy and markets.
We don’t yet know if negative rates will come into effect but one thing’s for sure – rates on savings accounts and Cash ISAs will continue to worsen (some are already close to zero).
And with inflation expected to rise (printing enormous amounts of money will do that to an economy), it means that money in savings will begin to lose value and buying power at an even greater rate.
What should you do about it?
Keeping some money in a savings account is sensible financial planning.
It’s the perfect place for holding rainy day money (6-12 months’ of household expenditure is about right for most) and expected short-term purchases e.g. property deposit, car or big holiday.
Beyond that, you should seriously consider ways of investing spare capital to achieve higher returns over time.
Why? You will most likely use your money to help provide an income to maintain your standard of living when your earnings eventually cease. If too much of your money is sat in savings accounts dwindling in value, it could start to limit your future choices.
The most obvious solution to this problem is to invest money that you don’t require immediate access to.
What should you invest in?
The most accessible mainstream investments tend to be shares, property and government/corporate bonds.
I could write about all the features, benefits and risks of these investments, but I think I’ll save that for a future blog!
Instead, it’s sufficient enough to say that a combination of these investments will, over time, give you more than enough scope to beat what you’re earning in the bank.
Investing is simple but that doesn’t mean it’s easy
You could choose to invest in property and become a landlord (no headaches there then).
You might decide to build your own investment portfolio of shares and funds (beware the money tipsters and YouTube gurus).
Or you could appoint a reputable financial adviser to help manage your investments (often likened to choosing a life partner – marry in haste, repent at your leisure!).
Yes, it’s an uncertain world out there right now. But however you choose to invest, times like these offer good opportunities to make positive financial decisions to help secure your future standard of living.
Whatever you decide to do savers, just don’t do nothing.
Thanks for reading.
Equity investments do not afford the same capital security as deposit accounts. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.