Moneytree Wealth Management

Best place to keep your money

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With inflation at levels the UK hasn’t seen since the 1980s, it’s becoming increasingly costly to hold cash. Yet, investing spare cash isn’t always that simple, as you don’t want to jeopardise your emergency fund as well as maintain some liquidity.

The declining use of banks

In recent years, there has been a noticeable trend of people turning away from traditional banks. This is for a few reasons, but it mostly revolves around emerging fintech alternatives, a distrust in the banking system, and the current economic environment.

Below are some financial-focus reasons for the declining use of banks. However, there are many non-financial reasons, such as the growing convenience, accessibility, and transparency of fintech alternatives.

Foreign exchange

Since the pandemic, remote work has taken off. The idea of being a freelancer, digital nomad, or small online business is now normalised. However, this means handling many different currencies, and traditional banks are generally very expensive in this. £30 is a common fee for overseas transfers, whilst exchange rates are often 2.5-5% worse than the real interbanking rate. Alternatives like Wise and Revolut, however, are much cheaper and faster for exchanges, as well as having better currency account management with virtual accounts.

Interest rates

Interest rates at high-street banks are typically poor. For many years, the Marcus savings account by Goldman Sachs was one of the best options for UK customers at 0.5% interest. Whilst this (among other accounts) have increased since the UK and US base rate rose, it’s clear that the reward we get for putting money in a high-street bank is fairly minimal. When taking into account inflation, it’s almost always losing purchasing power by the day.

Debt products

Banks are typically relied on for mortgages and debt products. Whilst this remains to be true, they’re not overly helpful for customers with a less-than-perfect credit score or small businesses in need of quick funding. Over the past decade, online alternatives have been growing rapidly as they have higher approval rates and an automated, faster application process. Increasingly, banks are looking more outdated in the way they handle debt services.

Distrust of banking

The decline in the use of banks is also driven by the growing mistrust of the banking system. In the wake of the global financial crisis of 2008, many people have lost confidence in the ability of banks to safely and effectively manage their money. NatWest have been fined £264 million for anti-money laundering failures, for example.

Why we still need a bank account

However, we can’t be too quick to disregard banks. Most importantly, banks have FSCS protection, which protects customers’ deposits up to £85,000. This is something that the likes of Wise and other fintechs who are financial institutions and not banks will not cover.

Furthermore, credit cards issued by banks typically have fraud liability protections unlike debit and spending cards elsewhere. This means that if you get scammed or defrauded, you’re much more likely to get your money back with a credit card.

Finally, whilst interest rates are often seen as poor with banks, many other fintech alternatives offer no interest whatsoever.

Where to put your cash

An emergency fund is our absolute priority. It's above both investing and overpaying on our long-term debt when it comes to importance. Generally, 3-6 months' worth of expenses is recommended.

For money that is going towards your far future, such as retirement, which may be 5 or 35 years away, sound investment practices are followed. But, what about your emergency fund or the cash you will use next year on a house deposit?

A challenger bank

Understandably, many people have a love-hate relationship with banks. For the money that we do keep in there, an online challenger bank may be preferred. They offer FCSC protection, have credit cards, yet may provide better exchange rates, accessibility, and sometimes better interest rates than high street banks.

A high-interest savings account is also an option, but be careful not to opt for one that penalises you for withdrawing at any point. If the interest rate sounds too good to be true, there are usually some limitations in the small print.

Bonds

Another place we can keep our emergency fund and savings is in some bonds. Premium bonds can often be seen in a negative light because of how irregularly they pay money out - it’s somewhat of a lottery. However, they’re a very safe place to keep money and still offer some reward. It may or may not be higher than the interest on a bank, but this is an investment that requires no real risk.

Another option is to use short-term bonds; many have maturities up to two years. The liquidation value of these bonds will fluctuate with the bond market and may take a day or two to liquidate, so it’s not wise to keep all of your emergency fund here. However, they can be a good in-between for money that’s not for long-term investing, or your whole emergency fund.

Fintech current account

As mentioned earlier, electronic money accounts (Wise, Revolut etc.) are perfect for multi-wallet currency handling. These are also perfectly fine for day-to-day spending too, though they don’t always offer credit cards (and thus the subsequently added protection). This makes them fine for spending accounts (or to receive overseas income into) but never as a substantial savings amount due to the lack of FSCS protection.

What to avoid

Some people may consider keeping cash. After all, it mitigates the risk of bank runs, fraud, and it’s more anonymous. But other risks arise too, such as robbery or simply losing it. It’s perfectly sensible to use a bank as the default place to store cash, mostly because of the FSCS protection. However, challenger banks can offer more for less in terms of functionality, whilst bonds and high-interest savings accounts can sometimes offer even more return.

What we cannot do is chase the endeavour to fully offset inflation. Some acceptance that our money is eroding over time is needed - humans are risk-taking when losing money and we need to resist this bias. The main issue with investments that aim to outperform inflation isn’t the liquidation obstacle, but that high reward often comes with high volatility - and the last thing you want is to need to sell investments in an emergency during a crash.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.

The Financial Conduct Authority to do not regulate on the following activities: Foreign Exchange, Advice on cash deposits and National Savings and Investments.

Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 27.01.23 to the financial promotions.

Paul Jenkins

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