12 May 2011, 8:30pm
personal finance:
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  • NS&I bring some good cheer on the financial front – widows, orphans and prudent mustelids get a break

    It’s been a rough couple of years for cash investors. Okay, so investing in cash is a bit of an oxymoron. You can’t invest in cash, not in the modern developed world. The tragedy of democracy is that it has its dark side, and the dark side is that the electorate have the “I Want It Now!” attitude of a two-year old, without the cute smile that goes with the latter. The yelling and throwing the toys out of the pram, however, is endlessly present in the voting masses, and as a result the unfortunate parents that have to get this two-year old to bed get re-elected every five years promise to deliver toys worth more than the toddlers can afford. They print more money to pay for those promises, and the increasing amount of money sloshing around the system outcompetes your cash, so it is a claim on less work tomorrow than it was yesterday. Sometimes the parents politicians get it very wrong, and it all goes to pot very suddenly and in a really big way.

    Thus it happens that inflation slowly rusts cash. That’s particularly bad at the moment because interest rates are low and yet inflation is high. Even if you could get an account that pays you RPI, you’d be taxed on the interest, so if you are a basic rate 32% taxpayer you need to get an account that pays a third more than inflation. Higher rate taxpayers can forget it, they get paid too much anyway according to the taxman, and that’s how they get levelled down so everybody is happy.

    So don’t hold cash then. D’oh, it’s not hard. How about some of those nice shares, if you try really hard to forget about the events of 2007-8 shares can hit the ticket, though you still get taxed at least 10% on dividends before you get them. The problem comes if your roof falls in during a stock market crash, you end up as a forced sale and lose hand over fist. I dodged that bullet at the end of 2007 when I had to suddenly totally liquidate my index fund ISA in a ‘life changing event’ because I was still decently in profit, but had that happened six months later I could have ended up still paying that debt off now. Once you’ve heard that bullet ping past your ear and ricochet off the floor, you learn. Cash has its place, and that place is your emergency fund, and you do it first, so you don’t have to sell up into a bear market. Just. Do.It. Before you go all Gordon Gekko and hold stocks 🙂

    The trouble is, cash is the only thing that is almost guaranteed to not suddenly throw a wobbly and fall in value by half. Everybody needs to have a cash buffer against the unexpected. Unless you are ERE who just uses a credit card. I admire and support his logic, which is impeccable, but I don’t have his courage. Once you have lived a year not owing a single entity any money, it is very hard to willingly return to owing money, though I note ERE uses the credit card to give him time to marshall his financial resources.

    A good rule of thumb is an emergency fund of about half your annual outgoings, which for most people means half their salary (if it’s more they aren’t going to be saving anyway!). For the average Brit that’s £10,000. RPI is currently 5% so you get to lose 5% of your emergency fund eery year, or £500 a year. So you have to top up by £500 a year just to stay still, and insure yourself against the same amount of emergency next year as you could cope with this year.

    Don’t know about you, but I can think of better things to do with £500 this year than the care and feeding of the emergency fund. So I am dead chuffed to see those nice people at National Savings and Investments offering index-linked savings certificates again. That way you lob your emergency fund into NS&I, and you get the following wins:

    • You can cash in early if the emergency turns up, which is what an emergency fund is for, none of this no access for five years lark some term accounts do
    • did I say they were tax free?
    • They track inflation, and that’s RPI, none of this CPI chicanery here
    • Pretty safe, if you lose money in NS&I a lack of cash will be troubling you less than you current immediate lack of tinned beans and an AK47. This is HM government, and they can always print the readies :). It’s not like saving with Icesave or Northern Rock

    All in all, pretty awesome, a safe home for your cash. You aren’t going to get rich on it, but your cash is worth as much at the end of the five year term as it was at the beginning, there’ll just be more of it. I kind of like that in cash. Monevator and his chums were griping about the paltry rate of extra interest – he balked at 1% so he’ll be scathing about the current 0.5% + RPI offering. But I don’t mind that. I don’t expect cash to make me any money, I’d just like it to be a store of value, and for it not to suffer a slow inflationary death to pay for empty promises made by governments to financially illiterate electorates. If I want to make money I have to start buying into companies or start my own, or work for The Man.

    So hats off to NS&I. I’ve just tossed £8k in their direction. I can now decommission my Cash ISA, which had been guardian of my emergency fund until now. However, I’m not going to withdraw the cash, I will do a transfer in to my Shares ISA, so I have effectively transferred my cash ISA to NS&I Index-Linked certs, and have the opportunity to still put in £10k for the year 2011/2012. Whether or not I get to achieve that is another matter, because saving £10k a year is challenging enough, but saving £17k a year in post-tax income is pushing the boat out a bit for me.

    So hats off to NS&I. That’s emergency fund, Job Done for me. Roll up to NS and I’s web-site here and grab yourself a slice of the action. They are a perfect fit for an emergency fund, with their £15k maximum. If you need an emergency cash fund of more than that you are someone of a seriously nervous disposition 😉

     
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