Earn A Colossal 8% On Your Cash

by Cliff D'Arcy on 05 January 2009  |  22 comments
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With the base rate at a record low of 2%, inflation is eating away at our savings. Fortunately, this account pays a fantastic fixed rate of 8% for a year!

Happy New Year to all Fool readers! To get this year off to an easy start, here's my short and simple suggestion to kick off 2009:

Start saving steadily

If you are in stable employment and spend less than you earn, then you're in an ideal position to squirrel away some of your disposable income. On the other hand, if your job is anything but stable or you have an irregular income, then you have an even greater need for a comfortable cash cushion to fall back on.

Your returns on cash depend on three things:

1. The interest rate paid (the higher, the better);

2. Your personal tax rate (because you can lose up to 40% of your savings interest to the taxman); and

3. The prevailing rate of inflation (that is, rising prices, because these undermine the future buying power, or `real' value, of your money).

Of course, there's not much you can do about the future cost of goods and services, so inflation is largely out of your control. However, you can improve the interest rate which your savings earn, plus avoid paying tax on this interest. If you dislike paying tax, then try the most popular tax-free savings account -- a cash ISA (Individual Savings Account).

Earn four times the base rate

The big headache for today's savers is that the Bank of England has cut its base rate to just 2% a year, its lowest level since 1951. Hence, earning a decent return on your savings in this ultra-low-rate environment is a serious challenge. Nevertheless, if you're serious about saving, then one of the best ways to salt away your spare cash is to make monthly contributions to a regular-savings account

In return for agreeing to make twelve monthly payments in a row, you can earn market-beating rates of interest on your contributions. Indeed, according to Fool.co.uk's independent, unbiased savings search engine, you can choose from 97 different regular-savings accounts. The yearly rates paid by these accounts vary from a pitiful 0.1% to a magnificent 10%.

Unfortunately, many of these accounts come with strings attached. Many smaller building societies now accept only savers from their local area. Other accounts (such as the table-topping HSBC Preferential Regular Saver account paying 10% fixed for a year) insist that you open a `premium' current account to qualify. I'm no fan of these expensive packaged current accounts, so I tend to steer clear of such conditional offers.

Even safer than houses!

Then again, I am very keen on the HSBC Regular Saver account, which is open to new or existing HSBC current-account customers. There must be millions of savers who could open one of these beauties and earn a handsome rate of 8%, fixed for a year. In order to earn four times the base rate, you must deposit £25 to £250 a month by standing order. However, any withdrawal will close the account and slash the interest rate, so leave this money well alone.

For example, if you deposit the maximum £250 a month for a year, then you will receive roughly £120 in before-tax interest. Of course, this is less than £240 (8% of £3,000) simply because you don't pay in the full £3,000 at the start. Instead, your balance rises steadily from zero to £3,000 over twelve months, so your interest is based on this growing pot and not on a level balance of £3,000.

Finally, HSBC is one of the world's largest and strongest banks. Indeed, following the near-collapse of the rest of the banking sector, HSBC is now worth more than all of the UK's remaining banks put together. Hence, I consider it a super-safe home for my savings -- and certainly safer than houses!

More: Find a splendid savings account | Get Free Travel Insurance and £100 | Six Money Must-Haves For 2009