How Can I Get A Better Return On My Money?
Getting a better return on cash has been difficult since the Global Financial Crisis (GFC) of 2007/8. Governments around the world dropped interest rates to an all-time low to help boost their economies. In turn, banks dropped the interest rates they pay to savers. Until last year, things had started to gradually improve but as soon as COVID hit, interest rates dropped once again to about zero.
What Are Current Interest Rates?
The Federal Reserve Fed Funds rate is 0.06% a year. This is a key rate for UAE savers as the US Dollar is linked to the UAE Dirham. Therefore US Dollar and UAE Dirham interest rates are linked. In the UK, the Bank of England base interest rate is 0.10% a year. In the Eurozone, the European Central Bank rate is -0.56% per annum. These are the rates at which banks lend to one another. Therefore, it would be surprising to find banks offering to pay savers more than this.
For expats, who generally bank offshore, no bank offers interest on an instant access account in Sterling, US Dollars or Euros. Therefore, we need to be a bit creative in the use of our spare cash.
Debt Based Saving Solutions
Credit Cards charge 30% or more a year. The economic effect of using savings to repay credit card debt effectively saves you this interest rate. Just make sure you have an emergency fund set aside of 3 to 6 months expenses.
Offset mortgages are a relatively new product in the UAE but have been around for many years in Europe. In this arrangement, you hold a bank account with the mortgage lender as well as your mortgage. However, you only pay interest on the net amount of your borrowing. So, if your mortgage was AED1,000,000 and you had AED100,000 in the bank account, you would only pay interest on AED900,000, not AED1 million. Banks charge more interest on loans than they pay to savers, that’s how they make money. With an offset mortgage, you effectively earn interest at your mortgage rate on your current account balance. This is achieved without needing to lock the money away. If you would like more information about off-set mortgages, please let me know.
With interest rates at all time lows, it has never been cheaper to borrow money. Therefore, if you have not reviewed your mortgage interest rate agreement in the last few years, I would recommend asking your mortgage lender what deals they have available. Then give this information to a mortgage broker to see if they can improve on it, after their fees of course.
If you are unable to repay your credit card debt in full, ask your bank about a consolidation loan. Interest rates on this type of lending should be lower than your credit card and it provides a structured repayment vehicle for clearing the high-cost debt. But remember to switch your credit card to repayment of the whole balance each month, otherwise you may find yourself in an ever-increasing spiral of debt.
Frustrated by low savings rates, many people have been confronted with investing for the first time. They have done this to try and maintain the value of their money. Latest inflation rates in UK and USA are 1.60% a year. With no interest being paid on deposits, this means the purchasing power of their money is falling by 1.6% a year.
When a person takes risks, they should be rewarded through higher returns over the long term. However, unlike bank accounts, investments have charges associated with them. Controlling charges is important. The lower your charges, the less risk you will need to take to out-perform cash. For example, if charges are 3% a year, your investment needs to grow by more than 3% a year to make the investment worthwhile. Whilst this may be achievable over the long term, the higher the return required to do better than cash the less likely you are to achieve that goal. By taking a lower risk, the returns are more predictable. This means that the likelihood of achieving your goals greater.
Reviewing the charges associated with your investments is a good way to potentially generate greater returns without taking greater risk. When clients come to me for advice on their existing investments, they often have legacy products charging very high fees. Often it is possible to save them significant sums of money over the long term.
Money can be made to work harder and achieve returns in excess of inflation. The key ways of achieving this are:
- Repayment of Credit Card Debt
- Using an Offset Mortgage
- Reviewing your Mortgage Interest Rate Agreement
- Consolidation Loans for Structured Repayment of Credit Card Debt
- Reviewing Investment Charges
Please contact me for more information on this or any other financial matter.