Why shopping around for the best interest rates can really benefit you

A shopping trolley at the supermarket

Since the start of the coronavirus pandemic, Brits have been hard-pressed to find a savings account that offers reasonable returns for their money.

When the Bank of England (BoE) slashed the base rate to only 0.1% in March 2020, many banks and building societies followed suit by lowering their interest rates.

If you want your money to grow effectively, shopping around between providers can really benefit you. According to recent research published in Moneyfacts, savers are missing out on around £2 billion each year by not doing so.

With rising inflation, shopping around for an account that helps your savings to grow can be very useful, so read on to find out why.

Inflation erodes the buying power of your cash over time

During periods of economic uncertainty, it can be useful to have an easy-to-access pot of money, in case you need cash at short notice. As we mentioned in a previous article, keeping a rainy day fund can be a great way to gain more financial resilience.

However, it can sometimes be risky to hold too much of your money in this way due to the impact of inflation. Essentially, if your wealth doesn’t grow as fast as the increase in prices, the buying power of your cash is being eroded.

A useful tool to see the effect of this over time is the BoE’s inflation calculator, which shows the change in prices over time.

For example, in 2021 it would have cost you £22,844 to buy the same goods and services that cost £10,000 in 1991. That’s due to an average rate of inflation of 2.8% over those 30 years.

In recent months, the cost of many goods and services has been rising. According to figures from the Office for National Statistics, the rate of inflation rose by 6.2% in the year to February 2022.

With the buying power of your cash being steadily eroded, it’s important to shop around to find an account that offers you a reasonable rate of returns.

You could consider using an ISA to store your cash due to their valuable tax benefits

With inflation so high, and the BoE’s base rate so low, cash savings may struggle in the coming months as their real value is eroded. However, by finding an account that offers a good rate of return, you can at least minimise the effect that this will have on your money.

If you want to find the account providers who offer the highest returns, many newspapers and online resources publish tables of this data. These can be a useful tool when shopping around.

For example, according to Moneyfacts, as of 12 April, the highest interest rate for an easy access savings account was 1%.

Of course, one alternative that you could consider is to save with a Cash ISA. One of the benefits of doing so is that any interest you earn is exempt from Income Tax.

However, it’s important to be aware that many of these accounts will offer a similar, or sometimes lower, rate of return to a typical savings account. According to Moneyfacts, the highest interest rate for an easy-access Cash ISA was 1%, as of 12 April.

Of course, another alternative to this is to invest a portion of your wealth, such as with a Stocks and Shares ISA. This can help it to keep pace with the rate of inflation, so your money can continue to grow in real terms.

Keeping excess cash in a fixed-term bond could be useful for business owners

For business owners, keeping an emergency fund of cash can be especially important, as it can provide an invaluable safety net in case your company ever goes through a rough patch.

Typically, many experts recommend that you keep around three months’ worth of operating expenses in an easy-to-access account, in case you need it at short notice. For example, if you have to pay a large and unexpected expense.

According to data from the Shawbrook bank, small and medium-sized businesses (SME) have more than £86 billion sitting in savings accounts that pay a low rate of interest. By switching provider, these companies could be earning an additional £4.2 billion each year.

Of course, unlike with individual savers, who might be able to invest a portion of their wealth, it can be much more useful for SMEs to keep their savings in cash. While keeping several months of expenses in an easy access account is useful, you may want to consider keeping some spare cash in a fixed-term bond.

While you won’t be able to access it until the period is up, you can potentially see a much greater interest rate on your money.

Of course, if you’re worried about the impact that inflation could have on your business, seeking professional advice can benefit you. Working with a planner can help you to make an informed decision with your finances, helping you to minimise its impact.

Get in touch

If you want to grow your wealth more effectively to resist rising inflation, we can help. Please email or call 01454 416653 to find out how.

Please note:

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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