It’s safe to say that savings interest rates haven’t been great for the past decade. However, the latest news that the Bank of England is holding its base rate at 0.1% – and rumblings of potential negative interest rates in the future – mean UK savers are now faced with an even starker choice.
Here at The Motley Fool, we want to help. So this article will look at some other ways to grow your cash – without having to rely on interest rates going up.
What do low interest rates mean for me?
The Bank of England keeping its base rate at 0.1% means that savings providers are likely to reduce interest rates further. But why?
Let’s break it down. The interest rate you have on your savings account is what your bank is paying you for saving money with them. This is determined by how much your bank gets from the Bank of England for holding money with them.
So if the Bank of England is only paying a low interest rate to your bank for their money, they are naturally only going to pay you a low interest rate for yours.
Low savings interest rates mean that cash stored in savings can devalue over time. Due to inflation, what you have in your account today may not be worth the same five years down the line.
Currently, the only piece of good news for savers is that inflation dropped to just 0.2% in August 2020. Which means there are more accounts available offering inflation-beating returns.
However, this latest decision to keep interest rates at 0.1% means that savings returns may once again drop below the rate of inflation – especially if inflation starts to climb.
Where’s best for my spare cash if interest rates are so low?
With savings interest rates not offering any real growth opportunities, one option to consider is investing.
Investing is basically taking some of your money and making it grow by buying things you think will increase in value. It spreads your money across different areas which aren’t cash. Examples include shares, bonds, property or funds.
For those looking to build their wealth at a higher rate than if it were sat in a savings account, share dealing accounts or stocks and shares ISAs are some investment options to explore.
Share dealing account
A share dealing account enables you to build your own portfolio. Here you can buy and sell shares, growing your returns over time. For more information on how share dealing accounts work, check out the best online share dealing accounts for 2020.
Stocks and shares ISA
A stocks and shares, or investment ISA gives you tax advantages while also allowing you to invest. It’s a tax-free investment scheme which allows you to invest in a range of stock market investments. And it protects your returns from income tax and capital gains tax. Take a look at our top stocks and shares ISAs for 2020.
Why should I look to invest?
The thing to know about investing is that the stock market tends to offer better returns over a longer period of time than savings do. But there is a risk that you won’t get back what you originally invested.
So, if you have spare cash that you don’t need to use in the next three to five years, you are more likely to see better growth if you invest than if you stick it in a savings account. And that is even before you factor in how low savings interest rates are currently.
However, the risk element means that stock market fluctuations will have more of an impact if you need to access your money in the short-term. If you are happy for your money to be invested for a medium to long term, the cyclical nature of the stock market means that you could achieve higher growth levels.
The decision on whether or not to invest is a personal one, and it will depend on your financial circumstances. But if you find yourself having paid any outstanding debts, with an emergency savings fund and no immediate plans to spend your savings, you may want to explore what investing could bring to the table.
You may find yourself earning a higher percentage than your savings interest rate.
Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.