Introduction
The Office of National Statistics has recently revealed that the basic rate taxpayer would have to earn 3.38% a year on their savings accounts in order to beat inflation. Having scoured the market of over 800 ISA and investment savings account it was found that only three offered rates that outweigh inflation and basic taxpayers rates. With this in mind, many are asking the question; are savings accounts worth it at the moment?
The Advantages of An Investment Savings Account
Despite the less than attractive interest rates available, savings accounts are still seen as the ultimate safe haven against financial problems. Rather than being seen as a way to grow your money, they are seen as an emergency fund. This is the reason easy-access savings have become more popular; they require a very small initial deposit and allow the account holder to have access to their money as and when they want without any penalty charges. This means if your car breaks down on your roof starts leaking; you’ve got a small pot of cash available to cover the expense. This essentially eliminates the need for short term credit such as loans or credit cards.
The low rates being offered these days has meant that many have looked at other ways to grow their disposable income. One option is investing however this is a risky business and requires a certain amount of knowledge in order to be successful. Savings accounts require very little knowledge and are a very safe way of guarding your disposable income; you simply need to put in a few minutes’ worth of research in order to get the best possible rates.
The Alternatives
As I’ve outlined throughout, savings rates rarely match inflation these days meaning that rather than growing your left over cash you are essentially leaving it to stagnate. So, what are the potential alternatives and are how effective are they?
Become a peer-to-peer investor
Peer to peer lending has grown dramatically in popularity over recent years. It works on the basis that all loans are funded by investors and the company simply acts as a middle man and executes the agreement. The benefit for the borrower is that they get low rate loans and the benefit for the investor is that they get a good return on their investment. Despite what many think, the risk involved is relatively low as borrowers must pass a number of strict checks in order to be approved for the loan. Well known peer to peer lender Zopa even offer a safeguard for investors meaning if the borrower ever fails to meet the repayments, they will personally guarantee you get your money.
Premium Bonds
One potential alternative to an investment savings account is premium bonds. These work on the basis that you buy bonds at $1 per bond (minimum $100 investment) and you will then be entered into a monthly prize draw to win up to $1 million. There are also a number of smaller prizes going right down to $25. Mathematically your chances of winning are boosted by the amount of bonds you have however this doesn’t mean by investing $30,000 (the maximum investment) you are guaranteed to win.
Millions of people hold premium bonds, which means that (according to data analysts) you have a better chance of winning the lottery than winning the $1 million jackpot prize. Fortunately though, if you ever need access to your cash you are able to withdraw you bonds and you will be charged no penalty fees. In essence premium bonds are a great option if you’re a gambler, however for someone who is looking for guaranteed returns, they’re probably not the way forward.
Conclusion
To answer the initial question; is an investment savings account worth it? Ultimately, it depends on your financial situation and your goal; if you’re a risk taker then premium bonds may be a better alternative. However, if you want fixed returns then a savings account or peer to peer lending may work best for you.