Each week, we bring you a round-up of what’s happening in the savings market and the accounts offering the best rates, so you can make the most of your spare cash.
Today, savings expert Anna Bowes from The Private Office explains how to earn higher, five-year rates on money without having to lock it up for five years…
If you want better savings rates but aren’t sure how much access you really need, you may want to try “savings laddering” – a not particularly new trend that people have been latching onto online.
Say you have £50,000 and you’re unsure if you’ll need it this time next year, you might instinctively invest the lot into the best one-year bond and review your situation in 12 months, by which time interest rates may have fallen.
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Splitting it into five £10,000 slices for one, two, three, four and five years allows you to hedge against lower rates.
Only £10,000 would be exposed to lower rates in a year’s time, while £40,000 remains locked in with higher returns.
Then, instead of reinvesting the £10,000 for another year, put it away in a five-year bond with higher rates, safe in the knowledge that another £10,000 will become available within a year when your two-year bond matures.
Repeat the process and by the end of your fifth year, all your cash will earn five-year interest rates, but £10,000 will become accessible every year.
What’s the downside?
Liquidity. You only have access to 20% of your capital (plus interest) each year.
If you find yourself needing the full £50,000 in an emergency, it’s likely that closing the account before maturity is simply not permitted.
However, if you don’t anticipate needing the cash and want to beat the cycle of falling rates, laddering can be a sophisticated way to keep your money working as hard as possible.