Cash can be terrific fun when you’re spending it on something you desperately want or enjoy doing.
It’s also 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.
And don’t forget to keep enough back for unexpected bills such as roof repairs or boiler breakdowns.
From an investor’s point of view, though, it 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!
In the current low-interest world we’re in, decent interest rates can be 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 can also be 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 have a look at the current products available with National Savings and Investments (NS&I). They have been going for 160 years and have 25 million customers.
More importantly, NS&I is 100% HM Treasury backed with no limits, unlike banks.
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 an account can only be held 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, I can say that 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 1% 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 (assuming you hold the full £50,000) may be 1 in 942,488, 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
NS&I’s Investment account is a postal operated account. This potentially requires a bit more effort when taking withdrawals, which could be a good thing in stopping the temptation to access it!
The account is an easy access account, and although classed as postal operated, withdrawal requests can actually be submitted online.
Depending on the amount being withdrawn, the funds are expected into your bank account within 1-3 banking days of receipt of the request.
The minimum balance is £20, maximum £1 million, and a parent, grandparent or legal guardian can hold an account for a child until they turn 16.
The interest rate for this account is currently 0.01% AER and paid annually. Any interest is subject to Isle of Man income tax.
NS&I Income bonds have a minimum balance of £500. The maximum that can be held is £1 million.
The interest rate is now 0.01% AER and paid monthly, meaning those holding less than £646 will not receive an interest payment.
Withdrawals can be requested online, and funds will reach your bank account within 1-3 banking days, depending on the amount requested.
As with the Investment Account, any interest is subject to Isle of Man income tax.
The Direct Saver is an easy access account with a minimum balance of £1. The maximum that can be held by any one person is £2 million.
The current interest rate is 0.15% 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 our friend inflation
As I said at the start, it is essential to hold a sufficient cash reserve. The key here is having enough but not too much, unless, of course, the impact of inflation does not concern you.
Interest rates are at a historically low rate, and although we can’t predict the future, it is highly unlikely we will go back to the double-digit rates of the early ’80s.
Inflation in excess of interest erodes the spending power of our cash and is the main reason why cash is unlikely to be the best option for your surplus capital for the longer term.