Important information: The value of investments and the income from them can go down as well as up, so you can get back less than what you invested.
I’m seriously considering putting most of my cash savings into premium bonds.
I’ve seen the interest paid on my cash savings account drop by more than half over the past year and after some Google searches I’m now ready to give up the little interest it pays. for the chance to win cash prizes from premium bonds.
It’s the first time that I’ve really seen them as anything but new. Issued by National Savings & Investments (NS&I), the state-backed savings provider, a premium bond can be purchased for £ 1. The bonds are then subject to a monthly draw. Prices range from £ 25 to £ 1million. Their reputation is more something a sponsor could give a child than part of a serious financial plan – but I’m starting to see them differently.
There are a few competing factors in my decision. First of all, this is money that I have specifically earmarked for cash savings that I don’t want to risk losing – so I don’t see any investments, where there is a chance that my money loses value in terms of money – as an alternative home for that. Investments are always at the center of my long-term savings and the regular contributions I make will continue to be spent on investments, mainly in the stock market. The money I have is separate from that and is currently not being added.
Holding money – between three and six months of income that you only use in an emergency – is an important part of any financial plan. Having this level of liquidity means that I can worry less about needing funds quickly and, in turn, it allows me to be more relaxed about the performance of the investments I have because I am less susceptible to have to plunder those who are mistaken. time. This is the money that I can exchange for premium bonds.
Second, I have to take inflation into account. One of the risks of premium bonds is that the value of your holdings will be eroded by inflation over time. If I buy a premium bond for £ 1 I can get that money back whenever I want, but I will only get back £ 1. If I hold my Premium Bond for many years, the purchasing power of £ 1 has probably gone down due to inflation.
At the moment, the general opinion is that inflation is about to accelerate, so the value of premium bonds will erode more quickly. This is not ideal, but it has to be compared to the reality of saving in a cash account. Inflation may rise and the Bank of England may raise its bank rate in response, but that’s not the same as saying that cash accounts will also pay savers more. Commercial banks can set their own rates and cannot pass on all or part of the increase in the discount rate. My current savings account – which allows access to my money when I want but limits withdrawals to two per year – brings in 0.51%, so still less than the current inflation rate of 0.7% – I are already losing money to inflation.
And if savings accounts suddenly start offering much better rates, I could always quit premium bonds to take advantage of them.