It is essential to ensure that you keep a sufficient cash reserve, or ‘rainy day fund’, to get you through any periods where you may have insufficient or no income.
Markets are currently struggling with increased volatility, with most mid-risk portfolios down over 10% year on year. Now would not be a good time to have to draw on an investment due to an unexpected bill, such as the boiler breaking down.
From an investor’s point of view, though, cash can pose several questions and concerns.
First, there’s how much cash is enough or too much to hold. This puzzle is one of the most important questions we answer when financial planning.
Then you have to decide where to put it!
We are starting to see interest rate rises in a bid to counter inflation. This follows a period of historically low rates over the last 10+ years.
However, decent interest rates are still hard to find for instant access accounts. High Street banks are likely the most convenient home for your day-to-day cash needs, and the ability to visit a branch in person is also helpful.
With the Isle of Man Depositors’ Compensation Scheme covering up to £50,000 per person per bank, they are also relatively safe options too.
But what other options are there?
Let’s look at the current products available with National Savings and Investments (NS&I). They have been going for over 160 years and have 25 million customers.
More importantly, unlike banks, NS&I is 100% HM Treasury-backed with no limits.
NS&I Premium Bonds can be held directly by anyone over 16. They can, however, be held by parents/guardians for minors.
The maximum you can hold is £50,000. Premium Bonds cannot be jointly held, so if you are a couple looking to invest, you will need to open an account each.
The fact you can only hold an account in one name can lead to probate being required on death. Typically, probate is not necessary for savings up to £5,000.
You can make one-off purchases or set up a monthly standing order. From personal experience, the process is straightforward.
You can apply online (no paperwork) and, to add funds, you can make a simple online transfer.
As with all NS&I products, the capital value is protected.
Premium Bonds can be encashed, with the cash in your account three banking days later (if requested online).
The fun bit! You do not earn interest on a Premium Bond. Instead, the 2.2% annual prize fund is used to fund monthly prizes ranging from £25 to £1 million.
Who is Ernie?
No, not Bert’s best friend! Nor the driver of the fastest milk cart.
Ernie is the Electronic Random Number Indicator Equipment used by NS&I.
Originally invented by a Bletchly Park code breaker in 1956, the technology used has always been cutting-edge.
Current Ernie (Ernie 5) uses state-of-the-art quantum technology.
Ernie generates the numbers for over 500 million tax-free prizes in just 12 minutes and, since 1994, has created over 400 new millionaires.
Checking the NS&I Prize Checker app* each month is quite exciting (sad, I know)! The odds of winning a million are incredibly slim, but someone has to win, right?
In addition, these ‘prizes’ are not subject to income tax.
*You are also able to check the results online
Green Savings Bonds
NS&I’s Green Savings Bond is their newest fixed-rate fixed-term bond. Unlike Premium Bonds, they can be held jointly.
The fund will be used to contribute to green projects. UK Government will publish details of the initiatives supported by and outcomes achieved by the fund.
The account is online only; unlike other accounts, money is tied up for three years. This means that the Green Savings bond is only suitable for your longer-term cash holdings.
The minimum balance is £100; the maximum is £100,000.
The interest rate for the Green Bond is 3% AER, fixed for three years. Any interest is subject to Isle of Man income tax.
Unlike Premium Bonds, Green Savings Bonds can be held jointly.
NS&I Income Bonds have a minimum balance of £500. The maximum that can be held is £1 million.
The interest rate is now 1.21% AER, paid monthly, and is subject to Isle of Man income tax.
You can request withdrawals online, and funds will reach your bank account within 1-3 banking days, depending on the amount requested.
Like Green Bonds, Income Bonds can be jointly held.
The Direct Saver is an easy-access account with a minimum balance of £1. The maximum that any one person can hold is £2 million.
The current interest rate is 1.20% AER.
The account provides easy access to your money with the cash in your account the next day if under £50,000. Larger sums take up to 3 banking days.
Available to anyone over 16, this account is managed/accessed online, and you have to option to hold several accounts which you can ‘nickname’ for specific savings goals or purposes.
You can hold a joint account.
Let’s not forget inflation
As I said at the start, holding a sufficient cash reserve is essential. The key here is having enough but not too much, especially considering the double-digit increases in inflation rates of late.
Inflation in excess of interest erodes the spending power of our cash and is the main reason cash is unlikely to be the best option for your surplus capital for the longer term.