Just as some of us prefer a hand-written letter to an email, there are also people who would rather hide their cash in their mattress than put it in a savings account. We show you how hoarding your cash could mean you are losing out.
Why would anyone do it?
The image of an old miser sitting atop a mattress stuffed with cash might be an amusing one, but it is not that far from the truth if stories in the media are to be believed. But what would drive someone to do it?
Well, the recent financial meltdown and events like the banking collapse in Iceland, have left certain people with a great deal of mistrust for banks. The credit-crunch has also given the mattress-stuffers the impression that hording your cash in your home is a safer option.
We have all seen the stories of riskier investments such as stocks and shares where people have lost their life savings, either through drops in the market or large scale fraud such as case of Bernard Madoff. There is also a perception that using a savings account at the moment is a poor investment due to the low interest rates currently being offered by the banks.
For some, choosing a mattress or another hideaway in the home over a financial institution can almost be a political statement - where they have no wish to make banks even richer by paying them for the privilege of handling their money. Others just like the feel of cash in their hand or - like my dear departed granny – they could be secretly squirreling away cash in case they ever need to make a fast get-away in the middle of the night from their significant other!
Why hoarding your cash is a bad idea
The idea of your money being safer in your mattress than in a bank does not really stand up well to any form of scrutiny. Even the most basic level of bank security offers a hundred times more protection than what your average home security system could. That’s not even taking into account the far higher risk of you losing your hoard of cash either accidently (like the lady in Israel) or through a disaster like fire or flooding.
While it’s true that your home insurance may provide you with some cover for your hoarded cash, there would be a limit placed upon the amount. This could fall well short of offering you adequate protection if we are talking about your life’s savings here.
Lack of cover is not an issue that you will have to worry about when it comes to depositing your savings in a UK-registered bank. Cash deposits are protected by the Financial Services Compensation Scheme (FSCS). This scheme acts as a safety-net for your savings and covers the first £85,000 per person, per separately FSA registered institution in the unlikely event that the institution holding your savings goes under.
And talking of savings - in hiding your cash away in your mattress you are also denying yourself the opportunity of your money making you money. Investing your cash in a savings account will mean that you can accrue interest on your deposit. Even with interest rates currently on the low side accumulating something is still preferable to accumulating nothing.
As paper tends to rot and degrade over time, the only thing you are likely to accumulate by storing your cash in your mattress is dry rot. Damaged bank notes can always be replaced, but there is something far, far worse than dry rot eating away at your cash. Without interest to offset it, inflation is busily devouring your cash – reducing its value year upon year as the cost of buying goods rises ever steadily.
Savings accounts
Before deciding where to put your cash, first have a think about how you want to use it. For example, do you need to be able to easily access your cash? Are you happy to tie it away for years? Or are you saving for something in particular like a wedding or dream holiday? Once you start thinking about your savings in these terms it will be easier to get an idea of which account will be right for you.
Always shop around to get the best rate for the amount you are saving and to take advantage of any special introductory offers that specific banks or building societies may be running at the time. Remember, it is always important to ensure that you check the terms & conditions closely for things such as bonuses, variable rates and withdrawal penalties.
Cash ISAs
Cash ISAs are generally the most profitable way to save as they offer the opportunity to earn tax free savings. Normal savings accounts are taxed at a rate of 20% for those who pay a basic rate of tax and 40% or 50% for those on a higher rate. However, the real advantage with a Cash ISA is that any saved funds up to a limit of £5,340 will be paid interest completely free of tax.
Although the interest rates on an ISA do not always appear to compare so favourably with a standard savings account, it is important to remember that your ISA pays gross interest rather than net. When this is taken into account with the fact that your savings are also tax free, ISAs can offer a far greater return on your money in the long term than a taxable savings account.
Pay off your debts
If you have any substantial debts then it could be a good idea to use your hoarded cash to pay these off before thinking about starting saving.
Traditionally, the interest rates on debts tends to be far higher than the interest rates offered on savings accounts. Because of this, using your spare cash to eradicate your debts first could be a highly profitable move.
