Stuffing money under the mattress …

Consumers may have lost faith in banks and are instead hoarding cash, if the increase in high-denomination bank notes in circulation is anything to go by …

It is probably better to restrict yourself to slippers under the bed

There could be many reasons for people using cash more than previously, not least of which could be a desire not to pile too much debt on their credit cards, so as to avoid high interest rates. After all, the best credit card deal available at the time of writing carried an Annual Percentage Rate (APR) of 16.6% for balance transfers, whereas a typical mortgage rate carries an APR of just 3.9%.

This is, of course, ‘comparing apples and pears’ because the use of mortgages and credit cards is totally different. But according to Credit Action, the average household owed £9,120 on non-mortgage debt at the end of October 2009.

This represents about one pound in six of overall household debt, so non-mortgage debt represents a significant amount on which higher interest is being paid. (Mind you, if you add the amount the country is expected to owe by April 2014, the total indebtedness per household is closer to £116,000).

Is there anything wrong with banks?
If the reason for keeping cash rather than leaving money in the bank is a fear of possible failures within the banking system, it is important to remember that the Financial Services Compensation Scheme provides a high level of protection; £50,000 per individual per banking institution. So a couple with up to £100,000 on deposit with one bank will be fully protected – although it is not clear how quickly the FSCS could actually pay out in the event of a bank default.

It is important to be aware that the limit applies per banking institution based on its regulatory relationship with the Financial Services Authority. If two banks within the same group share a single FSA registration number, then the deposits held with them will be aggregated for the purpose of the compensation limit. If, however, they have separate registration numbers, this should not occur.

Are other forms of investment protected?
Investments and home finance advice are also protected up to £50,000, although not against normal market fluctuations, of course. Life insurance is protected up to 90% of any loss sustained (as is home insurance, for example).

More goes into savings during a recession

Are we really saving less?
According to the Banking Times, we are as a nation actually saving more than a few years ago – 5.6% as against nothing not so long ago. But there is still some way to go to beat the 12% peak seen in the 1990s.

This is actually in line with predictions at the start of the recession, because this always happens; as we become more nervous about future prospects, we tend to save more. This can actually be bad for the economy, as less spending tends to reduce Gross Domestic Product (GDP) but in the current case, this does not appear to have been a problem (at least so far).

If you do decide to ‘stash your cash’ …
Please remember that your household insurance is most unlikely to provide anything like enough protection and in the event of a fire or theft, you could lose far more than you expect!

And don’t forget, despite an historically low bank rate, there are some good deals on the market, although many of these can carry restrictions and penalties if you try to get at your money before the end of a fixed period of time.

It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact us. As ever the value of investments is not guaranteed and will fluctuate; you may get back less than you put in.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND. 

<back

Please register for regular financial news and to recommend a friend:

Register with us

 

These documents require Adobe Acrobat. Downloads may not work with older versions, please download the latest Adobe Acrobat Reader version 9 free of charge and follow steps 1, 2 & 3