#24 Don't fix your rate for too long

by Jane Baker on 04 September 2009  |  3 comments
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Today's 'what not to do with money' advice is right up your street if you want a guaranteed return on your savings.

Today's 'what not to do with money' advice is right up your street if you want a guaranteed return on your savings.

#24 Don't fix your rate for too long

If you can afford to lock your savings away for a while, fixed rate bonds look like the ideal solution. For one thing, you'll know exactly how much interest you'll earn right from day one. So, there's no need to continually chase the best savings rates, like you would with a variable rate account.

But nothing is perfect.

The trouble is you might choose a market-leading fixed rate which looks competitive now. But how do you know it'll stay that way?

How would you feel if you locked yourself into an annual return of 4.5% for the next five years, but it turned out that the return on the average variable rate account over that time was say, 5.5% a year? Suddenly, 4.5% doesn't look quite so attractive. 

So, how can you make sure that doesn't happen?

Well, before you take out a bond, I suggest you think about two things. Firstly ask yourself this question: what do I think will happen to interest rates over the next few years? And secondly, use your answer from question one to help you answer question two: how long should I lock my money away for?

For example, here at lovemoney.com, we reckon interest rates will probably stay around where they are now for the next year at least. In other words, we don't expect savings rates to improve dramatically in the near future.

After 12 months it becomes a bit harder to call. But once the economy strengthens, I suspect interest rates will start to climb upwards again.

So, in my opinion - although you may disagree - the safest bet right now is to choose a short-term bond to cut the risk of losing fixed rate gamble.  I would say a bond which runs for one to two years maximum is probably about right.

What do you think?