Reality behind where first £1,000 of savings should go after Premium Bonds promise bigger payments
Not knowing what to do with our money is a common problem for young people, since it was barely ever brought up in school.
Since many of us are scrambling to get by as it is, due to rental or housing costs, significant inflation and poor wages, it's hard to not what to do when we actually have some money saved up.
Although there's a temptation to just quit your jobs and head travelling around the world, which is probably the most fun answer, it's probably not the most sensible option in these uncertain financial times.
Some folks like to invest in cryptocurrencies or take part in gambling but there's pretty much only three risk-free ways to guarantee yourself some interest on the money you have saved.
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Savings accounts at your bank, Premium Bonds and cash ISAS protected by the Financial Services Compensation Scheme (FSCS).are the only places where you can guarantee that you won't lose any money. But after National Savings & Investments (NS&I) confirmed recently that the prize rates would increase, where is the best place for your money?
It was only back in July that the NS&I confirmed that the prize-fund rate would increase from 3.3 cent to 3.8 cent, and in September, there will be another significant jump up to 4.38 per cent.
NS&I said the increased rate is to ensure it reflects 'current market conditions', and even if you've only got £1 of savings in there, your odds will also increase from one in 22,000 to one in 21,000.
But it is when you get to around £1000 that things become a little more complicated and leave many wondering where the best place to leave your money is.
The reality is that a savings account will always give you the more consistent source of interest on your money each month, as even with the prize rate increasing, there is sadly no guarantee that you will actually win any money.
Even with the maximum £50,000 invested in Premium Bonds, there's no guarantee that you will win a prize, even if your chances are significantly increased, since every £1 bond gives you a unique number, which is then entered into a monthly tax-free prize draw, with prizes ranging from £25 to £1 million.
Now, if you do like to take a risk, then the idea of winning a potential £1 million every month might be difficult to turn down but there are only two winners each month from over 22 million Premium Bonds users.
If you have £1000 in a savings account that pays out a 4.5 per cent interest, then you will earn around £45 in interest across a calendar year.
That means you only need to win two of the lowest Premium Bonds prizes from 12 attempts to earn more, as that would bank you at least £50, and you obviously have the chance of earning far more.
As pointed out on the MoneySavingExpert website: "Though this interest rate is variable, meaning it can go up and down over time, you know exactly what you'll earn at any given point – so it still provides more certainty than Premium Bonds, where many saving the same £1,000 would win nothing."
The more money that is invested into Premium Bonds, the more money that is paid out each month but the reality again is that, from September, only £4.50 will be paid out in prizes for every £100 that is put into the scheme.
The top easy-access cash ISA rate is currently 4.56 per cent – this is tax-free and offers a guaranteed return that's still slightly higher than the new Premium Bond prize rate of 4.35 per cent, which of course relies on luck to actually receive.
So, a savings account with a minimum 4.5 per cent interest, or a cash ISA, might well be the best place for your savings unless you want to hedge your bets and hope that your luck pays out every month with Premium Bonds.
Topics: LADwallet
James Moorhouse