With inflation high and interest rates low it can seem like a terrible time to having savings. The economy appears to be punishing those who did the right thing and put money away for a rainy day, and is reducing their wealth in real terms. So is there any better alternatives to having the money sitting in your bank account? Here’s a few savings and investment options that should help you gain an inflation-busting return.
Firstly the traditional form of simple investment: cash ISAs. The return on these isn’t great, but if you’re looking for a safe place to put your savings with little risk attached then you can’t beat them. Plus, unlike most savings and investment products, the first £5,750 put into a Cash ISA each year doesn’t see its interest taxed. That amount accumulates each year, so if you keep your allowance from the previous years in cash ISAs they won’t ever be taxed. Cash ISAs differ based on how quickly you can get hold of your money, typically with significantly better interest rates if there is a long period before withdrawal. Current best rates are 3% for a five year fixed ISA, 2.6% for two years, and 2.5% for a instant access ISA.
Peer to Peer Lending
None of the ISA rates are great though, so what are the alternatives? One current trend which many are talking about is peer to peer lending. This is done though internet sites that act as marketplaces where those in need of a loan and those looking to make an investment find each other. The interest rates from this form of lending can be significantly higher, with 8% being typical, but they also come with significant risk.
Peer to peer lending should be considered as similar to removing the middle man (the bank) and instead making the investment decisions yourself, carrying the risk they involve on your own shoulders. If you make the right decision of who to lend to you’ll get your monthly repayments on time each month and make a good return, if you do not then you could end up with defaults or even having to right off the money you lent. The key to lowering your risk with this form of investment is to lend lots of small amounts to different borrowers. Some of the sites have a safety net – a portion of all repayments goes into a collective chest to cover non-payment, but others don’t offer this feature.
Investing in property has long been a favorite of those with spare cash earning only small interest in the bank. Property investments were traditionally considered ‘safe as houses’, but many are starting to question this after the financial crisis led to property values plummeting and many investors being burnt. Like all investments there’s risks involved, so it’s important to consider if you think another house price crash is likely before getting into property investments.
Simply buying through the traditional estate agent route is unlikely to get you significant returns through buy-to-let compared with buying at auction then renovating, although the latter route involves more research, risk and time. It does however offer another alternative of property flipping, which works especially well in rising markets and up and coming areas. For instance the area of Brixton in South London is considered to be on the rise and the London property market is doing well, so this area would be a better bet than one that isn’t gentrifying or where prices are stagnant. You could consider purchasing abroad if you think you can get a better return or that the investment will be safer, but remember that property law is usually very different in each country and the distance can make managing a successful buy-to-let difficult.
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