Is it high time to ditch the lowly savings account?

It wasn’t long ago we were hearing stories of the accidental savers who piled away money during the Covid lockdowns. In fact, more than six million employees said they were able to save as they were not spending money on the usual costs of going out or commuting.

But where have we put it all? And where should it go now?

Savings rates are low but they have started, albeit slowly, rising. The market-leading easy-access account, for those who need to get their hands on their cash, is from Coventry Building Society paying, wait for it, 0.65 per cent. While Marcus, Saga, and Cynergy banks all have accounts paying 0.6 per cent.

Putting your money away for longer will no doubt increase your chances of making some interest, however the best you can hope for right now is 2 per cent for a five-year fixed-rate account from Recognise Bank or 0.95 per cent from JN Bank.

Locking your money away for five years is a big commitment, especially when during this time rates are likely to increase. This means you may be stuck with an account paying 2 per cent when you could be getting a much higher rate elsewhere, and there are usually penalties for closing fixed-rate accounts early.

There’s no point looking at savings rates without considering both the base rate and the current rate of inflation. The Bank of England base rate has been set at the historic low of 0.1 per cent since the start of the pandemic and it’s predicted to stay this way for some time yet. There are rumours it may rise early next year, but there is no certainty around this.

At the same time, inflation has been steadily creeping up and it’s predicted to reach 5 per cent by the end of this year, pushing up the cost of living and pretty much wiping out any interest gains from having your money in a savings account.

Rachel Springall, spokesperson for Moneyfacts, comments: “Moving into 2022, savers will be going into the unknown as it is uncertain whether interest rates will continue to rise at the pace we have seen over the past six months.

“However, there have been murmurings of a base rate rise in light of rising inflation and the impact on the cost of living. Regardless, in real terms, most savers will find the true spending power of their cash is worsening as cash interest rates cannot outpace the level of inflation, which is expected to be high for some time yet.”

So, what’s the answer - do you cut your losses and move your money into another form of investment, be is stocks and shares, the property market, wine or even whiskey? Or is it more sensible to leave the money where it is until things improve.

The answer will of course depend on your situation but the first thing to sort out is an emergency savings account, of between three and six months of your usual income.

Then if you’re able to keep an amount in a savings account which you can access for other spending, anything left over after both of these could be filtered into another avenue.

Sarah Coles, spokesperson for Hargreaves Lansdown, says: “Sometimes we have no choice but to keep our money in cash savings.

“You can’t risk having to suddenly access the money at the moment when the value of your investments has fallen. It means we should all be working towards three to six months’ worth of essential expenses in the most competitive easy access account we can find.”

Along with your emergency savings pot, you should also have cash to cover any planned expenses over the next five years, although you might be able to tie this up for short periods in fixed-term bonds in return for a better rate of interest.

Any kind of investment needs to be thought out and well-planned, and if it’s stocks and shares, you need to have time to let it recover from any dips in the stock market.

Away from the more traditional investments on the stock market, you could also try anything from buy-to-let properties and peer-to-peer accounts to commodities including spirits, art, or gold, or even the unregulated world of cryptocurrency. However, each comes with its own level of risk, and is a long way from keeping your money in a savings account.

“For any money that you won’t need for five to 10 years or more, then you could at least consider stock market investments for part of your portfolio,” adds Coles.

“These will rise and fall in the short term, but if you’re investing for the long term you have a reasonable chance of riding out these ups and downs and taking advantage of long-term growth in the markets.”