If you have a savings account in the UK, you have probably received an unwelcome letter from your bank recently telling you that the rate on your savings is being reduced… again. In fact, returns on cash accounts have fallen by an average of 75 percent since 2012 alone.
Governments around the world are attempting to stimulate the economy by printing more money (known as quantitative easing) and lowering interest rates (the base rate). The latter helps companies invest by lowering their borrowing costs. It also helps those with mortgages as most mortgage rates are linked to the Bank of England’s base rate. However, a lower base rate results in lower savings rates which impacts savers, particularly those using their savings to generate an income.
As most savings rates are less than the inflation rate at the moment, keeping money in a bank is effectively shrinking your wealth. So how can you beat the banks and continue to grow your wealth? To do this, you must transition from a saver to an investor by putting a proportion of your money into long-term, low risk investments. Preferably, these should be investments that can be included in an ISA to avoid paying unnecessary tax on any growth.
Investing is a scary word but the majority of us are already investing through our pension funds. Buying individual shares, or investing in the stock market for short periods of time (otherwise known as trading) is risky but this shouldn’t cloud your view of the stock market as a long-term investment. Amateur investors can easily invest in the stock market by buying into funds, whether they are actively managed or simple funds that invest in all the large companies in the UK (known as Index Trackers).
Buying stock market funds isn’t the only low risk investment available. Some of the other options which can provide great returns without significant risk include:
Corporate Bonds – loans to large companies that are sold to investors.
Gilts – similar loans to the Government that are also sold to investors.
Peer-to-peer loans – loaning small amounts of money to lots of small businesses and individual borrowers.
Property crowdfunding – shared ownership of houses and apartments
There is no single silver bullet for growing your money but a healthy mix of the above would certainly be a better alternative to leaving all your money languishing in a savings account. Indeed, it’s good to spread your money across multiple investments as a matter of habit in case one of your investments doesn’t provide the returns you expected. I recommend the following criteria for evaluating any investment opportunities:
Good returns: the returns are expected to be at least double the current saver rates offered by banks.
Accumulative: the returns can be easily reinvested to benefit from compound growth.
ISA eligible: the investment can be wrapped in an ISA to reduce the impact of tax.
Regular investments: it is easy to make regular monthly investments so you don’t have to try to time your investments (pound cost averaging).
Low risk: low to medium risk of losing your money either through poor performance or failure of the investment company.
Liquid: it must be possible to sell the investment quickly if needed, without losing a lot of its valuation or being heavily penalised.