There are hundreds of places that we could keep our money – from under the bed to in complex derivative investments. However, here at Moneystepper, we only suggest that you break your money down into 3 main areas and then work out the best place to keep each.

Today, we take a look at what funds should be kept in long-term investments and which should be kept in shorter term accounts such as a current account. We also look at some options for the best current accounts to keep your cash, including the TSB Classic Plus account which offers 5% interest on credit balances up to £2,000.

 

 

Where Should You Keep Your Money?

At Moneystepper, we recommend a very simple strategy to money management. This may change based on your personal circumstances, but is a generally strong rule of thumb to follow:

1. Keep your emergency fund saved in cash in an instant access account.
2. Any savings that will be spent in the short-term (under 5 years) should be saved in the best fixed interest rate account possible (not forgetting to consider tax implications).
3. Long-term savings (over 5 years) should be invested, not saved, in either low-cost market tracking ETFs, property, small business or other high return ventures.

We’ll address the reasons for each below.

 

1) How Much Should I Keep In My Emergency Fund?

So, the first part of your money should be held in cash in case of an emergency. The idea is that when unplanned events occur, you will need this cash to be liquid and easily accessible. Emergencies are anything which have not been budgeted for and that jump up on your unexpectedly!

How much you should keep in your emergency fund is a matter of debate. In fact, rather than going into masses of detail here, I would suggest that you research our “emergency fund” section and find the most applicable strategy for yourself.

Then, once you have decided how much your emergency fund should be, you need to work out where to keep it. The most important factor is that it is immediately accessible in the case of an emergency. After that, you want to be sure you are earning a good amount of interest on your money. This is a very costly mistake that people often make.

For instance, there are many current accounts out there which pay no interest at all. Say you decide that you want to keep 6 months’ expenses in your emergency fund and this equates to £10,000, then you’ll be missing out on £300 each year by not earning any interest compared to an account which paid you 3% interest.

 

 

2) What About Short-Term Savings?

The next “group” of money is your short-term savings. This is money that you are putting away for a specific event or purchase in the coming years. This could be a deposit on a house, a wedding or a big holiday, for example.

Again, there is no point in just putting this money in a 0% account as you are losing a lot of potential benefit.

On the other hand, you also do not want to risk putting this money in riskier investments which give great returns in the long-run but can be extremely volatile in the short-term.

Imagine that you got engaged in early 2007 and put £10,000 savings in the FTSE 250 ready for your wedding which you planned for the autumn of 2008. Come October 2008, the global recession and stock market crash would have meant that your savings would only have been worth £4,750 and your wedding might be in trouble! Not ideal!

Therefore, your short-term savings should be put into an account which earns the best guaranteed fixed return possible. Remember that when making comparisons, you’ll need to apply your tax rate to any interest earned on any non-ISA accounts.

 

3) Where Should I Put My Long Term Savings?

That is a very personal question and will depend on your investing preferences, risk tolerance, etc. The key is that you should be looking to earn 8% above inflation on your long-term investments and that “cash” is never a great investment in the long-term.

Again, there is far too information to cover in this one article, but would recommend the following to help you in the right direction:

• What Should I Invest In? Property vs Shares vs Cash (Article)
• Why Passive Investing Is Better Than Active Investing (Article)
• ISAs vs Pensions (Article)
• ISAs vs Pensions (Podcast)
• The Power Of Leverage (Podcast)

 

 

How Hard Is It To Switch Current Accounts?

One of the most common mistakes that people make with points 1 and 2 above is that they do not switch current accounts in order to obtain the best interest rate. The most common reason cited for this is that they do not understand how easy it is to switch banks.

Most of this is due to the new regulation that came in a few years back which encouraged all major banks to agree to the Current Account Switch Guarantee, which ensures the smooth transition of your current account (and all related income and expenses from it) from one bank to another within 7 working days.

The account switching process is now extremely easy and TSB summarize it well in their account switching procedures:

 

Conclusion

Current accounts have become much better places to keep your emergency fund and short-term savings and the account switching process is much easier than in the past. Therefore, you no longer have any excuses not to be earning good rates of interest on your “short-term” cash funds. At the moment, you could be earning up to 5% for amounts up to £2k with TSB, or 3% on amounts up to £20k with Santander.