Interest Rates Are Lousy, So Why Save?

09Dec11

With low interest rates meaning that most savings accounts are failing to keep much ahead of inflation is it still worth putting money into a savings account?

There are various reasons why the Bank of England has kept the base rate of interest down. Partly it has been an attempt to allow the lending that needs to happen in order to for the economy to keep moving, but perhaps it has also been the intention to encourage consumer spending rather than saving.

It is certainly no secret that inflation is high and the interest rates being offered by banks on savings accounts are low. This has meant that it has been tempting to either just enjoy spending the money before inflation erodes its buying power, or to look to different types of investment. Both of these courses of action however have major flaws.

Finding a higher rate of return on the investment of money saved might seem like a bit of a no brainer. Things are not that simple. With greater returns almost inevitably comes some combination of increased risk and increased inflexibility.

Putting money into a UK bank may not be sure fire road to riches right now. At least it is safe though. The government guarantees savings to a very high level, meaning that you will still have your cash even if something goes badly wrong with the bank it is in. The same can not be said for other kinds of investments, with the situation generally being that you are on your own in joining the queue of creditors.

With what is happening in the eurozone right now there is every chance of things going very badly wrong with all kinds of financial institutions. The possibility of widespread sovereign debt default is being talked about, and this could prove to be too much to bare for the lending institutions. There is only a limited amount of money available to bail out banks, and the damage to the financial sector could damage the value of a whole range of investments.

Nobody knows what is going to happen with the global economy right now. Until a clearer picture emerges the argument for keeping your money safe and ready at hand is compelling. A lot could change over the next five years, so being locked into a five year investment could be far from ideal.

What goes for uncertainty in the economy goes double for uncertainty in personal finances. Wages and job security are not in a good place at the moment. It would be a brave person indeed who made decisions predicated on their income rising in relation to their outgoings over the foreseeable future.

The increased likelihood of unemployment or drastic falls in income is a reason why it may be wise to focus on having funds in reserve in government guaranteed savings accounts. They may not be performing as well as an investment as you would like, but at least they are there.

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