FOOL'S EYE VIEW
Where To Stash Your Cash

By Stuart Watson (TMFTiger)
February 19, 2002

Great Titchfield Street, London -- A question we often see asked on our discussion boards goes something like "I've got £X pounds having just sold my house/car/priceless collection of whatever and I won't need it for 2 weeks/6 months/2 years. Where's the best place to put it?"

There are various options but a few points should be made first. When you are looking at short timescales like this it makes little sense to take any risks with your money. So this rules out things like shares or property. Of course you might get lucky and make a tidy little gain but you need to ask yourself how you would feel if you lost some of the money instead.

Secondly, 'best' is not really an appropriate word with regards to financial products. It's very hard to say what will turn out to the best in advance. Equally, what looks like the best thing for one person may not be so good for someone else, depending on what sorts of risks they are prepared to take and what other investments they already have.

When looking at homes for short-term cash, things are a little simpler, as a judgment can be made based almost entirely on current interest rates. However, if you're looking for a home for rainy day money for several years, those paying the highest interest rate now may not be so generous in future. In other words the accounts will generally only be the 'best' for a short period of time. That puts the onus on you to make sure the rate you're getting is still competitive. But the good news is that it is much easier to compare accounts these days, with the advent on internet comparison tools.

Enough of the finger wagging though. Here are some of the various options, in increasing order of exoticness.

Current accounts

Most current accounts pay a pitiful rate of interest, usually only a fraction of 1%. But a number of recent new launches, especially for online accounts, offer similar rates to branch-based savings accounts. You can even take this one step further with a current account mortgage, where your savings reduce the rate of interest that you would otherwise pay on your mortgage. The main advantage with this is that you don't pay tax on interest saved, like you do on interest earned. 

Savings accounts

The humble savings account is where many of us park our dosh. It's easy to get access to our money at short notice but the rates paid are often not overly generous. Many companies have a wide range of different accounts, introducing new ones every now and then as a marketing tool to draw in more money whilst rates fall away on older accounts. So you should check your rate of interest on a regular basis, say every 6 months, and be prepared to move your money to another account or another company, if necessary.

Some of the top rates are paid on internet accounts where you can get more than the Bank of England's base rate, which is currently 4%. For a branch-based account you might be looking at 2% to 3%, with the higher rates only kicking in when you have more to invest, say £25,000 plus.

Cash ISAs

Many cash ISAs pay decent rates of interest, in line with internet-based savings accounts. But there is no tax to pay. Unfortunately, you can only put in £3,000 every tax year, so the tax advantages are quite small. Using up part of your ISA allowance for cash will also restrict the amount you can put into a share-based ISA. Over 6m cash mini ISAs were opened in the last full tax year, the average amount invested being £2,300.

Notice accounts, term deposits and savings bonds

If you know that you definitely won't need your money straight away, then you might be able to get a better rate of interest in a notice account. With these, you have to give a certain amount of notice, say 90 days, before withdrawing your money. Giving up the right to get at your money quickly gives the bank or building society more flexibility, meaning that they can afford to give you a slightly better rate of interest.

Taking this to extremes would mean 'term deposits' and 'savings bonds', where you deposit your cash at a given rate of interest for a fixed period of time. Currently you can get around 5% to 5.5% if you are willing to part with your money for three years. Whilst this is more than you would get in an instant access account, the higher rates may also reflect the fact that the company providing it expects rates to rise a little over the time period as well. Whether that will be the case is impossible to predict although they probably have a better chance of getting it right than you do.

Premium bonds

Premium bonds might be an option if you want a little excitement. Your capital is not at risk and you can invest up to £20,000. However, the average prize fund payout has been falling recently. Last autumn you'd expect to get, on average, a return of 3.5% per year from premium bonds but, as of March 1, it will be just 2.4%. All prizes are tax-free.

Money-market funds

These are similar to unit trusts, except that the fund manager invests in various short-term deposits rather than shares. The idea being that they can trawl for the best opportunities on your behalf, rather than you having to keep an eye out for any changes. However, the catch is that the cost of managing the fund can negate the extra income earned. In practice, few people seem to use them.

More: Check the high interest accounts in our Online Banking Centre.