High interest rates? Time to get saving

This is an audio transcript of the Money Clinic podcast episode: ‘High interest rates? Time to get saving’

Claer Barrett
Before we start this week’s episode, a quick request from me. We want to hear from you. What topics would you like us to cover on our upcoming shows? Money Clinic simply couldn’t happen without the community of listeners who email in and let us know their burning financial questions. So don’t be shy. Drop me a note at money@ft.com or DM me on social media. I’m @ClaerB. We’re especially keen to hear from people who are looking to clean up their financial plans in the new year. Look forward to hearing from you. Now on with this week’s show.

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The Bank of England is poised to raise interest rates for the eighth time in a row this week, with markets expecting the base rate to rise to 3 per cent, the highest it’s been for over 15 years. And their expectations, it could peak at 5 per cent in the middle of next year. Now that might be unwelcome news for anyone with a mortgage, but there’s better news for those of us with cash savings. If you could afford to put away a bit of money every month, you could be getting 5 per cent or more on that money. But how does that stack up against inflation? In today’s show, we’re gonna be looking at the role good old-fashioned cash should play in your financial plan now that life is coming back into the savings market.

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Welcome to Money Clinic. The weekly show about personal finance and investing from the Financial Times. I’m Claer Barrett, the FT’s consumer editor. For today’s show I’m joined by two fantastic experts, starting with Iona. Introduce yourself to our listeners.

Iona Bain
Hello, I’m Iona Bain. I’m a writer, speaker, broadcaster and author who specialises in personal finance, but particularly from a young person’s perspective.

Claer Barrett
Well, thanks for joining us today. And then over the line, we have the wonderful Sarah.

Sarah Coles
Hi, I’m Sarah Coles. I’m a senior personal finance analyst at Hargreaves Lansdown.

Claer Barrett
Well, you’re two people who I speak a lot to about the ups and downs of the financial world. We’ll be hearing from one of our listeners shortly. But firstly, let’s talk about what’s been going on with interest rates. So this Thursday, the Bank of England’s Monetary Policy Committee will meet. What will happen then and what could it mean for our finances? So the markets are expecting interest rates to rise probably to around 3 per cent. But at the same time, so is inflation. Now, Sarah, what’s the link between interest rates and inflation?

Sarah Coles
Well, one of the the Bank of England’s jobs is to try and keep a lid on inflation. And one of the ways they do this is through interest rates. So the idea is if you put up interest rates, it’s much harder for people to borrow and it makes more sense for them to save. So you kind of sucking demand out of the economy. So there are fewer people trying to buy things which they hope will naturally bring down prices. And obviously, at the moment, it’s a bit tricky because the supply side is the side that has a huge amount of problems. So we’re looking at things like energy and oil, which are pushing prices up. So there’s only a limited amount that actually the Bank of England can achieve. But it is sort of pulling all the levers that can. So it is it is likely to be increasing interest rates. But when they when they start making their announcements again.

Claer Barrett
Mmm-hmm. I mean Iona inflation at the moment just over 10 per cent. There were some figures out from the ONS today showing the price rises on supermarket value ranges is running at more like 17 per cent a year. I mean, it’s just so hard to avoid the cost of living all around us. Everything is getting more expensive.

Iona Bain
Yes, although you need to do your own inflation audit, right? You need to understand what prices are going up in your own life. And prices aren’t necessarily rising right across the board and we can see changes month from month if we actually look at the items that the ONS measures. So, yes, we’ve been seeing the price of things like, you know, pasta and milk have gone up a lot. But at the same time, the price of things like meat and orange juice and rice have come down. So maybe dinner tonight ought to be chili con carne washed down with some orange juice. But in all seriousness, I think that’s why it’s really important to figure out where costs are rising and therefore, how you can cut back meaningfully.

Claer Barrett
Well we’re gonna to hear now from a Money Clinic listener who got in touch with us about this gap between the interest rates on savings and the rate of inflation. Here he is.

Francesco
Hi, my name is Francesco. I’m a doctor. I live in London. I work for the NHS. I’m married with two children and I’m 38.

Claer Barrett
Now Francesco started thinking about savings when he was listening to a podcast episode about how mortgage rates and inflation rates are costing us all a lot more money. But at the same time, he’s thinking about . . . 

Francesco
How the corresponding increase in savings rates hasn’t really materialised. And therefore the next thought was, well, how do we sort of protect ourselves against that? And or is there anything we can do with our savings to make things a little bit more bearable over the coming months?

Claer Barrett
Francesco told me he’s been putting money semi-regularly into different pots over the years. Some money he’s invested into a stocks and shares Isa. Some he keeps as an emergency fund in a normal savings account and then some he was putting into a cash Isa too. But actually he stopped doing that fairly recently.

Francesco
The interest rate on my cash Isa went down. I was making almost no interest on the small amount of money that was there. So that actually this you know, the amount of money I can save is probably best placed either in somewhere that’s easier to access. So my normal savings account or something that might be a bit more productive.

Claer Barrett
That might bring you back a better return.

Francesco
But for the long-term, yeah.

Claer Barrett
The biggest thing on Francesco’s financial horizon is that his fixed-rate mortgage deal is coming to an end in 10 months’ time. That means he’ll go from paying 2 per cent interest to what’s currently predicted to be a 6 per cent interest rate. That will cost him a few hundred pounds extra a month. And that’s on top of the price of everything creeping up as inflation rises.

Francesco
The feeling, I think, between both myself and my wife is that we should probably be trying to build up a slightly bigger buffer than what we have. I think in all honesty, that hasn’t materialised yet. But . . . 

Claer Barrett
The desire is there.

Francesco
The desire is definitely there. Yeah, yeah, yeah, yeah.

Claer Barrett
But then at the same time, the biggest problem for cash savings is, is inflation. 10 per cent inflation. The absolute best rate you’re gonna get if you lock up for a few years at the moment is around five, which is half.

Francesco
Yeah, you know, absolutely.

Claer Barrett
So it’s kind of expensive to be safe.

Francesco
Mmm. Mmm. Yeah.

Claer Barrett
So what would Francesco like to ask our experts?

Francesco
So my main worry was that given the current increases in the cost of living, inflation going up and mortgage rates going up without a corresponding increase in saving interest rates, where does this leave us really as savers? And also, what can we do within reason to mitigate at least some of the increasing costs?

Claer Barrett
Well, we just heard there how Francesco is concerned that while mortgage interest rates are going up, interest rates on savings accounts aren’t increasing at the same rate. Now, is this true? And why is that the case? Now, I’ll put this to both of you. Are interest rates actually gonna go up for savers? And does that mean that we’re gonna go into a new era for cash savings? Starting with you, Iona.

Iona Bain
Well, the really frustrating thing here is that banks and building societies are much quicker to raise mortgage rates than they are to raise savings rates. Funny that, isn’t it? I wonder why. So we probably shouldn’t expect savings rates to go up as quickly as mortgage rates. And of course, we just do not know how quickly the Bank of England is going to raise the base rate over the coming months. There has definitely been a flurry of really competitive savings rates coming on to the market in recent weeks. But it’s really hard to tell whether or not we’ve hit the peak yet or if we could be in for, you know, a few more months of a much better deals coming through.

Claer Barrett
Well, I mean, certainly anyone who lock their money away in a two-year savings bond four or five months ago is gonna be ruling the day. Now, I went to see my colleague, Tommy Stubbington, he’s one of the FT’s markets gurus. We looked at the screens together. Now, markets at the moment are expecting the UK base rate to peak at around 5 per cent in the middle of next year. Now that sounds high, but after the “mini” Budget the markets were expecting interest rates to hit 6.25 per cent in the UK. So it’s come down since Trussonomics has been killed off and Rishi Sunak has been given the keys to No 10. But those interest rates sound quite tasty. But there’s one obvious problem, isn’t there? None of them come close to matching the current rate of inflation, which is just above 10 per cent. Sarah, what do you have to offer on this?

Sarah Coles
Well, it doesn’t sound great on paper, does it? But there is one thing to bear in mind, and that is when we talk about inflation, we’re looking back. So we’re looking at how prices have changed over the past 12 months. So we know the prices have gone up by 10 per cent. When we’re talking about fixing a savings rate for the future. We’re actually looking at what it’s going to be like over the next 12 months or the next 24 months. And so we kind of it’s a totally different period. And when you’re looking at this sort of looking at the forecast, what’s going to happen to inflation over that kind of a period, it’s very different. So we’re seeing a lot of forecasts now come in and say, well, in 12 months’ time, we’re likely to see inflation at around 5 per cent. So actually, if you’d managed to get 5 per cent on your savings, then you’re actually doing pretty well and getting pretty close to breaking even with inflation. So on paper, it looks pretty, you know, pretty unpleasant at the moment. But actually, if you, if you sort of take a step back and look forward, then it looks much more positive.

Claer Barrett
Mmm. Now we talk about the different savings accounts and products and rates shortly. But first, there are lots of different ways to use cash savings accounts to meet different short- and medium-term needs. Now, let’s start off by talking about your cash emergency fund. Now, Iona, in your book, Spare Change and also in your book about investing, Own It!, the emergency fund is just such a key thing to have.

Iona Bain
Yeah, absolutely. But I think the problem at the moment is threefold. Firstly, if people haven’t built up their emergency fund, their ability to do so is going to be really squeezed over the coming months by rising living costs. People are cutting back their saving as well in order to get through everyday life. People are having to dip into their savings as well. So when we talk about having an emergency or rainy-day fund, lots of people will be thinking, well, if this is an emergency, then what is? So surely you can forgive me for maybe raiding that account right now.

Claer Barrett
That’s what it’s for.

Iona Bain
Absolutely. You could argue that. And the third factor that we tend to overlook is that we have this rule of thumb that you ought to save three months’ worth of expenses into an easy-access account.

Claer Barrett
In an ideal world.

Iona Bain
In an ideal world, yes. But actually, I think that the cost of living crisis is really going to challenge that rule because, say, we were to embark on an experiment now and try to live off, you know, three months’ worth of expenses in a savings account right now. See how far that goes? Well, I think we’d last about as long as Liz Truss lasted in Downing Street. So I think we have to maybe rethink that kind of rule and take a step back and ask what is an emergency savings pot for? I think the main reason why we should keep saving money, you know, even though it’s incredibly tough right now, is because it gives us choices further down the line. So I would try to avoid dipping into savings right now because I think that will be to your advantage in the long run. But if you cannot commit to having three months’ worth of outgoings in a savings fund, don’t beat yourself up. You know, this is a tough time.

Claer Barrett
Now, lots of bank accounts, particularly digital banks like Monzo or Starling, have developed what’s known as savings pots, where you can separate your money into different funds. Iona, tell us a bit more about how they could be used.

Iona Bain
So these savings pots and spaces are separate in your account and this is where you can send money to and they can be really helpful if you are trying to compartmentalise your finances. Because I think a problem that lots of people have is that they tend to spend from their main account. They haven’t really got a sense of how much money is left over for essential bills, and they’re worried that they’re gonna run out.

Claer Barrett
I very rudely have a savings space on my digital bank account called “Time to F-off on holiday”, which at the moment is dangerously close to being raided. Sarah, well, Sarah, tell us a little bit more about how you’ve heard people use sinking funds or savings spaces. What kind of strategies is this useful for?

Sarah Coles
I think one of the real benefits of separating your savings pots is, is to sort of being able to think about what your savings are for. So often we find this, particularly amongst people who are retired, they might have a big bunch of cash that they may have taken as part of that tax-free cash, that sort of sitting in an account waiting. But they’ve never really thought about what it’s for. And by sort of separating it out and thinking, well, you know, this is for, I don’t know, doing the kitchen in five years or this is for a new car in two or whatever it is. You then can think about whether or not you can fix that. So you can put it into a fixed-rate savings account, which is tied up for a specific period of time, and in return you get better interest. So it actually can be helpful not just to help you account mentally for, you know, where your money needs to go and what you want to spend it on. But it can also help you get more out of your money at the same time.

Claer Barrett
Mmm. Now, another one for the digital savings buffs is saving without realising it. Now, Iona, you’re a big fan of round-ups, an easy way of rounding-up your digital spare change within an online savings account. Can you explain exactly how it works?

Iona Bain
So say you have spent £2.50 in a coffee shop, but then you check your bank account and you’ve been debited £3. Don’t worry, you haven’t overpaid for your coffee. What’s happened there is that your bank has taken 50p extra from your account. They’ve not paid it to the coffee shop. They’ve paid it into your savings instead. So that’s why it’s called round-up. It’s a rounding-up to the nearest pound and making sure that the spare change is going into your savings.

Claer Barrett
Now, Sarah, what about saving cash for a medium- to long-term goal? Something like a property deposit. That’s popular with our listeners.

Sarah Coles
Yeah. So if you’re aged 18 to 39, there is an extra way that you can sort of supercharge your savings. So if you’ve got at least a year until you want to buy your first home, you can consider a lifetime Isa.

Claer Barrett
Mmm.

So this lets you pay in up to £4,000 a year and the government will top it up by up to £1,000. So that could be £1,000 worth of free money towards buying your first home. But there’s loads of there are rules and limitations and it is important to know what you’re getting into. But if you’re in that position, then it’s a really brilliant way to sort of get a free head start.

Iona Bain
I’ve got another suggestion as well. If you’re looking for a techie way to save more money, as well as these digital first accounts that have savings pots and spaces, you could look at a financial chatbot as well. So this is an AI programme that you can link up to your account. This programme will analyse what’s going on with your finances and then they’ll set up a dialogue with you and the likes of Cleo, Chip, Plum. They all offer this and it can feel like a firm friend is talking to you about your finances through, say, Facebook Messenger. And that is the approach that lots of people quite like because they can get nudged into saving more in a month where maybe they’re spending a bit less. And also, these chatbots are very good at kind of telling you when maybe you’re going a bit overboard.

Claer Barrett
Like a personal trainer for your savings.

Iona Bain
Exactly. Yeah. We all need one of those, (Laughter) I think.

Sarah Coles
I think it’s possibly is also worth saying that there is an old-fashioned technique, which is the sort of idea of paying yourself first, which is on payday, setting up that direct debit to go straight into a savings account so you never see the money, you’re never tempted to spend it, and you’ve got that sort of clarity of exactly how much is going to go. So you’re not sort of getting to the end of the month and you just give you facts to be rounded-up and you’re going, you’re gonna have to get money back from your savings account in order to make ends meet.

Claer Barrett
Well, we’ve given listeners loads of ideas about how they can get saving the money, but now we’re gonna turn to where to put it. Products, types of savings accounts that you could consider opening and the kind of goals that you could use these for. Now, Sarah, I’ll start with you, at the moment, and it is a fast-changing market, what are the best deals when it comes to easy-access accounts and the sort where you can lock your cash up for one year or more?

Sarah Coles
Well, definitely the general rule of thumb is that if you go online, you get a much, much better deal than if you go into a branch. And usually you get a better deal from the newer banks that are sort of competing to win your business. So at the moment, on an easy-access account, you can get up to 3 per cent. Now that would actually going against all of what I’ve just said is actually available online from HSBC.

Claer Barrett
Mmm.

Sarah Coles
But although that has got a sort of you have to look at the small print with some of these really great accounts because you any month that you take money out of that account, that, that rate will drop dramatically. So I’ll go right down to half a per cent. If you want something with a bit more access then you can get 2.81 from Al Rayan. And that means that you can access the money anytime. If you’re sort of looking to fix it up for a year, then you can make much more. So if you’re sort of looking at sort of, you know, just under 3 per cent or 3 per cent for you easy access, you can make about 4.5 per cent by fixing it for a year. And obviously, at these rates, they’re just going to keep nudging up. So we will see those change, you know. But by the time you’re listening to this, it may well be even higher.

Claer Barrett
Now, another popular option are what are known as regular savers offered by current accounts. Iona, do you want to explain what a regular saver is?

Iona Bain
Yeah. So this is where you commit to putting a certain amount into a savings account. And normally the amount that you can contribute over the year is capped. But the upside is that you get an absolutely killer rate on that account. And I think this can be a really great option for people who are starting out saving, who maybe want to be a bit more proactive than leaving it to round-up saving or maybe feel like they want to be a bit more ambitious. And I think certainly it is good to be ambitious when it comes to saving, especially if you’re starting from scratch.

Claer Barrett
In terms of the interest rate, you can get 5 per cent on regular savers from NatWest, Lloyds and Yorkshire Bank. You pay in every month and then after a year you get your money back. But Iona, what’s the best rate on easy-access accounts?

Iona Bain
So one of the best accounts at the moment on the market is Barclays’ Rainy Day Saver that pays 5.12 per cent, which is pretty juicy. That’s on any amount up to £5,000. And it is, as things stand, the top regular saver account on the market. But, you know, Sarah was saying this before. A lot of these accounts do tend to come with strings attached. So the most common one is that in order to get these regular savings accounts, you have to have a current account with the bank first. Now, that’s not necessarily a problem. Some of these banks are also offering pretty good current account switching offers, too. And if you’re not that happy with the bank you’re with at the moment, it might be worth switching the account to get one of these regular savers offers. But it’s just a reminder to really look at that small print and understand what you’re getting into before you buy.

Claer Barrett
Yeah, I mean, Sarah, certainly you can get up to £200 for switching your current account from one to the other with certain deals on offer at the moment.

Sarah Coles
Yes. And if you are looking to start building your savings, they are really great option. I think when you are sort of getting into the realms of switching your current account for a quick bond from the bank, it’s kind of worth looking at that in the round as well. So if, for example, there’s a risk you’ll go into your overdraft, you need to look at the overdraft rate. If you tend to have savings, then, you know, looking at the regular savings or even whether they pay interest on money that you have in that account. So there’s quite a lot to look at as well as having the free money. But free money is always nice.

Claer Barrett
Mmm. And then finally, what about premium bonds, Sarah? The rates on those have go up recently, but what are they good for?

Sarah Coles
Yes, the premium bonds is a strange one because the sort of the prize rate that’s talked about is actually very, very different to the experience that you’ll have if you have premium bonds. So really the point with premium bonds is you don’t get any interest at all. But you can win prizes and you can win life-changing amounts of money. So your experience will depend on how lucky you are. And if you have an average amount of luck, you actually won’t win anything. So you’ll be losing money after inflation. And this, of course, matters more to people when they can get more interest elsewhere. And when inflation is high, they become more concerned about sort of losing the value of these of the savings that living in premium bonds. So they tend to be used for people sort of specific things. So some people like to put sort of lump sums for a period of time that they’ll need later. So some people will use it to pay their money due in the tax return, for example. But you do need to be aware of the price that you’re paying. And if you’re going put a large amount into premium bonds over the long-term, you do need to be thinking about, you know what, actually, if I did that a year ago, even I have, you know, it would lost a 10th of its spending power. So there is a price to be paid for it. But, you know, we know that people love it. We know that, you know, millions of people have premium bonds and love it when they get a prize.

Claer Barrett
OK. Now, moving on, another use of cash could be paying some extra of your mortgage every month before a fixed rate expires. What should people be thinking about here?

Iona Bain
Well, again, there’s a rule of thumb that if you are going to earn a better interest rate on your savings, and that’s going to be higher than the rate that you would pay on your mortgage, then don’t worry too much about paying down your mortgage. Keep saving. I would say keep saving anyway. But if you do have some extra cash that you can put towards paying down your mortgage, it’s well worth considering. Just sharing what I’m planning: I have some cash that I’m definitely going to put towards paying down my mortgage. And as things stand, depending on what happens to rates, what I might well do is just wait for my fixed-rate deal to end next year. And then if the SVR rate — standard variable rate — is not too bad, I may well just lapse on to that and then use this cash to pay down more of my mortgage. Because the thing is, with a fixed-rate deal, I’ve worked out that I can only overpay 10 per cent and I would like to try and pay off more than that, and I can do that on an SVR deal. Now, that’s not something that I would necessarily recommend for everyone. That’s just because I’ve looked at my own finances, I’ve worked out the sums, and I reckon that this is something that I could do and that it might be a better use of my cash. Because the thing is, you know, if you can pay down your mortgage in the long run, it’s gonna free up your money to do other things. You can put it towards your savings, investments and pensions. So that’s something that I’m very keen to do, but it’s really important for you to go away and work out the sums yourself and figure out whether that is a good idea for you.

Claer Barrett
Well, thank you so much, Iona Bain and Sarah Coles. I think you’ve given listeners a wealth of information and tips to get cracking on when they start to look at their own savings strategies.

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Claer Barrett
Now that’s it for Money Clinic this week, and we hope you like what you’ve heard. If you do, please leave us a review. And if you’d like to chat with me on a future episode of the show, as I said, get in touch. Our email address is money@ft.com or send me a DM on social media. I’m @ClaerB. Money Clinic was produced by Persis Love and Philippa Goodrich. Our executive producer is Manuela Saragosa. Our sound engineer is Breen Turner and the original music is by Metaphor Music. And remember, Money Clinic is a general discussion around financial topics and does not constitute investment recommendations or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s the small print over and done with. See you back here soon. Goodbye.