Is a current account the best home for my money?
Is a current account the best home for my money?
Inflation is soaring and interest rates have tanked, so could a current account - where interest rates of up to 5% are possible - be the best home for your savings?
We’re in the midst of a full-blown cost-of-living crisis with the price of almost everything shooting up. Inflation for January rose to 5.5%, up from 5.4% in December, and it’s predicted to reach 7% this year.
At the same time interest rates are at rock bottom, and if you have savings there’s little hope of making much of a return if they’re in a standard savings account. The Bank of England increased the base rate to 0.5% in February, but it’s still way below the soaring rate of inflation.
There are alternatives and one is keeping cash in a current account. The interest rates are higher, although there are limits on the amount of money you can earn interest on. There are a host of other benefits on offer including free cash or cashback on your spending.
Or you could try your hand at investing, the returns are usually a lot higher and made over the long term, although there’s also a degree of risk involved.
Here we look at your options if you’re debating opening a new current account for your savings, the kind of interest rates on offer, the pros and cons of going down this route, and the best alternatives.
How much interest can a current account pay?
In an attempt to beat the competition and bring in new customers, the banks have added a wide range of features to current accounts in the past few years.
As the banks fight for new customers, these have really ramped up in the last few months. Several banks are giving away money to new customers – either in one-off payments, with cashback, or by paying interest on balances.
In the current climate, an account that pays interest can look especially tempting. It’s a great benefit - especially given the current rate of savings interest available - but before you move your money over it’s worth fully checking the terms and conditions.
Often the interest rate is on a specific amount of money within your account, and this isn’t unlimited. So, you might get 5% interest on balances of up to £2,000, for example, but this drops for anything over that amount. The interest may also be paid for a limited period, such as the first 12 months.
Therefore, the overall interest you could earn could be far less than putting the money into an alternative savings or investment product.
What extra benefits are available with your current account?
As well as interest payments, many current accounts have extra sweeteners to tempt new customers. These are usually one-off sums of cash which are paid when you open a new account. To qualify you’ll usually have to meet certain requirements such as a minimum monthly income to the account and the money is usually paid after a few months.
These are not to be sniffed at, especially at a time when money is tight. But they shouldn’t be the only reason for opening an account.
It’s also important to pay attention to any fees applied, such as a monthly or annual charges for using the account, or penalties for using overdrafts if this is something you think you may need.
It’s also worth looking to see if there are any linked accounts - such as regular savings accounts - which you’ll get access to with the current account.
What are the best alternatives?
Where to put your money is a completely personal decision. It also depends on what you’re looking for.
It’s important to spread out your assets and not keep them all in one place. Therefore, opening up a new current account to take advantage of interest paid on the money it, plus any welcome cash bonuses, could be done alongside other savings and investment options.
There’s nothing to stop you spreading your savings among your current account, a savings account, plus an investment product, for example.
This also gives you the benefit of having easy-access to your cash if you need it, to pay for everyday costs or unforeseen expenses, a home for longer-term savings such as money towards your next DIY project or holiday, plus money invested over a longer-time frame which could generate a higher rate of interest.
That way you can benefit from each different financial product and remember you don’t need to be loyal to one provider. If you see a better offer from another financial company, you’re free to switch.
Where can I get the highest rate of interest?
You may be able to snag interest rates of 5% with a current account, but this is likely to only be on a limited amount of money for a certain period of time.
Standard savings products are unlikely to pay anything near this amount at the moment, but they have the advantage of giving you easy access to your money if you need it. They’re also a safe home to store some of your cash, as there is little to no risk of you losing this money.
Investing is a different ball game, but one to look into if you have the resources and you’re looking for higher returns. You have lots of different options here.
Investing with an IF-ISA is one, with easyMoney for example you could earn interest of up to 8% - plus any returns are tax free, up to the annual ISA limit. Interest can be paid monthly and to date no loan through the company has made a loss.
But with the higher rate of interest also comes the risk that there is not yet any protection under the Financial Services Compensation Scheme (FSCS).
If you are debating it, you’ve only got until April 5th to take advantage of the current limit. After then you’ll get a brand-new allowance, but for the 2021-2022 year if you haven’t used it by this date you’ll miss out. Please remember you may not get back the full amount you put in. Your capital is at risk if you invest and not protected by the Financial Services Compensation Scheme (FSCS).
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All the facts and figures presented are accurate at the time of posting.
easyMoney is not a cash savings account. You may not get back the full amount you put in. Your capital is at risk if you invest. Peer-to-peer investments are eligible for an Innovative Finance ISA which is not a Cash ISA. They are not protected by the Financial Services Compensation Scheme (FSCS). Money invested through easyMoney is concentrated i n property and could be affected by market conditions. For the same reason, instant access cannot be guaranteed. We do not offer investment or tax advice.
easyMoney is the trading name of E-money Capital Ltd, a company incorporated in England & Wales. Registered office is 5 Fleet Place, London, England, EC4M 7RD (Company No. 04861007). E-money Capital Ltd is authorised and regulated by the Financial Conduct Authority (FCA) #231680.