12 May 2011, 8:30pm
personal finance:
by

22 comments

  • May 2011
    M T W T F S S
    « Apr   Jun »
     1
    2345678
    9101112131415
    16171819202122
    23242526272829
    3031  
  • Archives

  • 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 😉

    Yep, it’s good news isn’t it. 🙂

    On the griping front, I was hesitant about Salis’ purported RPI-2% worst-case scenario.

    I’ll take them at 0.5%+RPI for the diversification, especially as they have confirmed you’ll be able to cash them in after a year.

    I wonder how long they’ll last for?

    Bad timing for me as the day before I opened an account at 2.75% and my readies will remain in cyberlimbo for a few days yet. Not sure about this one, though.

    I think the point about an EF is very well made, but I don’t really have the need. Also, I have a feeling that we may see substantially higher rates from major providers in 2/3 years time at a time when RPI might be falling after a near term rise.

    I’m not saying this is a bad call, just that, over 5 years, others might be as good. If they are still around in a few weeks, though, I might get some for a bit of diversity.

    @Monevator, okay, I could see the lack of attraction of RPI – anything 🙂

    @SG, unlucky on the timing, though hopefully you’ll realise more return if rates do go up. I’ve been waiting for these, indeed I may marshall some more cash and hit that 15k limit. How the heck do you manage to live without an EF – do your cars and washing machines never wear out? I found it one of those ironies in life that ever since I’ve had an EF I’ve either learned to live without stuff that broke as I didn’t want to break into the EF, or I rolled up my sleeves and fixed the dratted thing, again because the incenitve not to break into the fund was too high. But I am sure there are limits 😉

    I’ve got particular reasons for wanting to hold cash as I’ve also saving about three years’ running costs from when I quit work, which is expected to be shorter than a typical shares investment horizon.

    What’s great about these is I don’t need to worry about cash – no Icesave syndrome here. And it’s cash, I just don’t want to worry about cash, simply find as much when I come back to it as when I put it there. If I want worry, my ISA, business investment and non-financial investments are more interesting and can deliver enough concern to spice life up, with the possibility of a real return…

    Ermine, I do have an EF (but no car!), so I don’t particularly need to set up another. I’m just not sure if it’s worth eviscerating what I’ve already set up in order to go for these.

    I’ve already got £10k in the last IL cert issue (3 yr) anyway, but I am coming around to the idea of getting some more. The safety aspect is an appealing one, and I think Monevator is wrong in the sense that you can cash them in at any time, but in the first year you only get your deposit money back.

    Given that the corresponding unlinked rate is 2.25%, this suggests that, as you say, they should be viewed as a safe haven rather than an investment.

    @Salis – Yes, it’s worth adding that interest penalty caveat, and I’m doing so in my article today.

    That said, I see little chance of savings accounts matching this return over the next 12 months, especially for higher rate taxpayers.

    […] maximum investment per person, the limited issuance is likely to be snapped up very soon. Blogger Simple Living in Suffolk is beside himself with joy: All in all, pretty awesome, a safe home for your cash. You aren’t […]

    Yes I echo what Salis has said in his first comment regarding the NS&I’s latest offering. I do feel that the major providers will up their game in relation to interest rates in the not too distant future (they already have), I also feel that inflation will fall.

    Hi ermine

    I’m with you on the pro’s of ILSC’s and already have plenty of them. I’m going in for the full amount. Just need to get my money out of my savings account (paying 2.1%), in to my current account and across to NS&I before they are sold out.

    Cheers
    RIT

    @ermine
    Howdy from the other side of the pond, and thanks for the insightful anaysis. I just bought my year’s allocation of $5K in I-bonds, which seem to be the U.S. equivalent, by transfering from my EF at ING, which currently earns a paultry 1.0%. Even with the 0% base, the inflation adjusted yield on the I-Bond is 4.6%. If sold prior to a five-year holding period, you sacrifice the three most recent months interest. Quick, back-of-the envelope math shows that even with the penalty, the annual ROI beats the current 10-YR benchmark and handily outperforms bank certificates of deposit.

    So the rejoicing goes across the water and includes certain canny rodents.

    @SG, Monevator, I’m still trying to wrap my head round considering cash as part of an investment portfolio. At the mo I fall on the side of the nays – it’s insurance, and a store of value, well, at least with ILSCs it is. Which is a bummer, my cash holdings now exceed my shares ISA, but I may need to call on this within 5 years, so cash is king there.

    @Dreamer, I’m not so sure on inflation, though I note there isn’t anything better for 40% taxpayers at the mo. Of course the VAT part of inflation will come out next Jan, but the structural increases in food and fuel look like the beginnings of Peak Oil to me… However, if they deliver the kick to get others to raise their game that’s no bad thing!

    @RIT, you’ve been more thorough that I was, I planned to stagger my purchases over last year to I had a ladder coming out in two year’s time. Then they pulled ’em in July 2010! So I’ve hit them up for £13k so far and if they’re still open at the end of the month I’ll take ’em for the lot.

    @Maus Welcome from Blighty 🙂 Yes, I bonds are very similar. The UK government is a little more generous than Uncle Sam in that the interest in tax-free and they accept about US$25,000 per issue. However, bouth our countries have been indulging in large amounts of QE and it looks like it’s payback time for the inflation monster in the next couple of years, so small creatures need to get some shelter from the coming storms 😉

    […] buddies. It’s about time some of the lowly grunts that actually have to work for this money got a slice of the pie, don’tcha think? I haven’t loaded up my full 15k because I still have to earn the last […]

    […] buy – I have £7k of my ISA unused this year, but I’ve been concentrating on building cash reserves with NS&I of late. Hopefully the Greek denouement will bring things back down to earth a bit ready for me to […]

    […] when, so I’ll sit tight. and save to buy more, I have been waiting for this rumble, and have switched much of this year’s savings to cash in the […]

    […] holding off buying shares for the last couple of months, partially because I wanted to get into index-linked cash in a serious way, but now I am going to start saving towards a war chest to buy into that shitstorm […]

    […] You may even want to own some assets that don’t produce an income at all, but will either need to be periodically sold down (for instance a gold ETF) or else that mature as a lump sum (such as an NS&I index-linked bond). […]

    […] Retail savers don’t need a universal FSCS protection scheme. We just need the option. I’m happy to save in a shares ISA, knowing that I could lose most of it in a market crash. However, I’d like to have somewhere I could park cash without the same feeling that it could all die quietly in the night. I don’t expect cash to give me a return, I’d just like to find it still there when I come back for it. […]

    […] immediately start to decay in real terms in that unappealing way that only cash does. As soon as National Savings and Investments open their doors again for index-linked savings certificates I will double up my existing 15k holding with them. That I […]

    […] can save it, in bank notes under your bed, or in National Savings ILSCS if they’re available, or a bank deposit […]

    […] known any way of saving cash 1 where I could even match inflation, with the one exception of my NS&I Index-linked savings certificates, which I loaded up on just before they withdrew the […]

    […] only managed to do that twice before NS&I ILSCs disappeared like summer rain – when they briefly reappeared I hit ‘em straight between the eyes with the full £15k. The low-maintenance […]

    […] I have been lucky that inflation has been low in recent years, because only some of this cash is protected by ILSCs. That is because I have been coasting, and slowly my operating cash is dropping.  As a […]

    […] Jacob ERE. Of course I will still need an emergency fund of sorts, but much less. I will retain my NS&I ILSCs and shift the rest into a new S&S ISA. I don’t need the three-years expenses cash buffer […]

     

    Leave a Reply

     
  • Recent Posts

  • Subscribe to Simple Living In Somerset via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.