Banking/Savings Section

A Great 1 Year Fixed Bond At 5.16% But How Much Should One Invest?

May 2006

The Birmingham Midshires Building Society has just launched another great one year fixed cash bond, details are -

• 5.16% gross interest rate paid yearly, or
• 5.04% gross interest paid monthly
• Minimum deposit is £1, maximum £1million
• NO withdrawals are allowed, not even with a financial penalty such as loss of interest etc

How Much Should Be Invested In Fixed Rate Bonds With No Flexibility

Earning 5.16% on your money fixed for a year cannot really be beaten but to get it you have to give up flexibility or access to your cash. Flexibility and having access to your money is important for many people.

A question that’s often asked by savers is -

I have £x of cash savings how much of it should I lock up in these great paying but inflexible fixed rate bonds?

Of course there’s never one correct answer because everyone’s financial circumstances are different but we would suggest these guidelines -

1. If you have less than £5,000 in cash savings then always deposit this is a instant access account
2. If you have more than £10,000 in cash savings consider depositing a maximum of 50% in a fixed rate bond such as the one discussed above
3. It’s better to tie your savings up for one year than three years even though a three year bond will usually pay more interest, for example -

At present the Bradford & Bingley has a 3 year fixed cash bond paying 5.25%, again with no withdrawals allowed

3 years is a long time to have your money tied up unless of course you have a lot of it, so someone with less than £25,000 would be better off using a combination of a 1 year fixed bond and instant access savings accounts

However, if you have £40,000+ why not consider investing £5k-£10k in the 3 year bond to get that great interest rate

Summary

Deciding how much cash savings to invest in these fixed bonds always depends on how much you’ve got. Those with smaller amounts of money should always look to remain flexible and go with instant access. But the more money you have the more you can chase the higher yields while keeping a proportion in instant access.

And remember that Instant Access Savings accounts still offer some great returns of between 4.5% and 5%. Note also that the difference per year on £1,000 deposited at 4.50% or at 5.15% is only £6.50 so the gap is hardly that wide.

The final point must be that if in doubt then ALWAYS keep your financial options open at the expense of a better rate of interest.

See Also

• The Birmingham Midshires Building Society
• Find's list of Online Savings Accounts