Banking 101 -
Is your money working for you?
There is often an element of future-gazing when it comes to managing your money as part of wider financial planning, as you need a plan designed to meet your needs today, tomorrow, and over the longer term. Depending on your circumstances, your financial plans may involve a combination of solutions designed to protect and grow your wealth.
Whatever structures you have in place, there is always a need for cash and in an interest rate-rising environment, you will want to maximise the way your cash works for you. Now is always a good time to ask is your money working for you?
Interest rises
With interest rates increasing, it might be time to take stock of your cash savings as it can be easy to overlook funds in low interest-bearing accounts. There are several types of savings accounts available on the market from instant access to longer fixed term deposit accounts, which can optimise the interest you receive. Typically, fixed term deposits offer some of the most attractive rates.
Fixed term deposits
Fixed term deposits offer a fixed rate of interest over a set period. This approach means you know how much interest you will receive at the end of the fixed term deposit, giving you clarity over this element of your savings strategy. Fixed term deposits are designed for saving lump sums, however, you can also use these accounts to save smaller amounts over a series of fixed term deposit accounts known as “laddering”.
Laddering
Laddering is the term given for spreading money over fixed term deposits over different periods of time and interest rates such as on a monthly or quarterly basis.
For example, if you were to deposit £1m into a one-year fixed term deposit today, you would know the interest rate you would receive at the end of the fixed term.
However, if you believe that interest rates might increase over the next 12 months, and that more attractive rates are yet to come, laddering could offer you more attractive rates and more flexibility, allowing regular access to your money on each maturity.
Here’s how it works
For illustrative purposes only (rates may not be actual):
|
Term |
Gross Annual Interest |
AER* |
Initial deposit |
|---|---|---|---|
|
12 Month |
1.50% |
1.50% |
£1,000,000 |
*AER (Annual Equivalent Rate) represents the actual interest you will receive on your deposit by the end of the fixed term if interest is paid compound on an annual basis.
Instead of fixing one deposit for a year you may choose to separate the money and allocate the money over different time periods so that the fixed term deposits mature regularly.
An example is below:
|
Term |
Gross Annual Interest |
AER* |
Initial deposit |
|---|---|---|---|
|
1 Month |
0.50% |
0.50% |
£100,000 |
|
3 Month |
0.75% |
0.75% |
£100,000 |
|
6 Month |
0.95% |
0.95% |
£100,000 |
|
9 Month |
1.25% |
1.25% |
£100,000 |
|
12 Month |
1.50% |
1.50% |
£100,000 |
|
15 Month |
1.55% |
1.55% |
£100,000 |
|
18 Month |
1.60% |
1.60% |
£100,000 |
|
21 Month |
1.65% |
1.65% |
£100,000 |
|
2 Year |
1.70% |
1.70% |
£200,000 |
|
Total Average
|
1.32% |
£1,000,000
|
|
This initial ladder of deposits will pay a slightly lower average interest of 1.32% versus the 1.50% for the one-year fixed term.
If at each term maturity the money is not required, then a new fixed term deposit of two years can be placed. This will start to increase the average rate whilst continuing to give you access to 20% of the funds within a three-month period. By giving up some of the initial rate for the benefit of regular access you can combine both a higher rate and regular access over the longer term.
As previously noted, if each deposit on maturity was renewed on a two-year fixed term, then after a year, your profile of fixed term deposits would look like the below and the average rate will increase to 1.67%.
|
Term |
Gross Annual Interest |
AER* |
Initial deposit |
|---|---|---|---|
|
3 Month |
1.55% |
1.55 % |
£100,000 |
|
6 Month |
1.60% |
1.60% |
£100,000 |
|
9 Month |
1.65% |
1.65% |
£100,000 |
|
12 Month |
1.70% |
1.70% |
£200,000 |
|
13 Month |
1.70% |
1.70% |
£100,000 |
|
15 Month |
1.70% |
1.70% |
£100,000 |
|
18 Month |
1.70% |
1.70% |
£100,000 |
|
21 Month |
1.70% |
1.70% |
£100,000 |
|
2 Year |
1.70% |
1.70% |
£100,000 |
|
Total Average |
1.67% |
£1,000,000 |
|
The laddering approach allows you to take advantage of the most attractive rates available today and in the future. You can mix and match terms as well as interest rates giving you a combination of deposits to meet your needs.
Laddering can help you meet both the interest you receive, and the maturity dates you require for providing intermittent access.
In an interest-rising environment, as each fixed term deposit matures, you may have a more attractive deposit rate available. However, it’s important to remember the opposite is true in an environment where interest rates are falling.
Creating a financial plan
If you would like to understand how this might work as part of your savings strategy, and which combination of deposits might work for you, please do get in touch.
Discover how laddering might help you. Speak to one our team today.
FSCS:
Eligible deposits are protected up to a total of £85,000 by the Financial Services Compensation Scheme. Please click here for further information How FSCS protects your money or visit www.fscs.org.uk.
Further reading
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