Most people appreciate the importance of having an emergency fund that is instantly available should a crisis occur, but once a buffer has been built up, what are the options for the rest of your savings?
Fixed rate bonds are one option that may be suitable for those who want to keep their capital safe but earn a decent rate of interest.
Fixed rate bonds are issued by banks and building societies and are a more rigid type of savings account that typically lasts between six months and five years.
Once the term of the bond has been selected, the interest rate will not budge between the bond being opened and expiry, regardless of what the Bank of England rates do.
Normally, no withdrawals are allowed without financial penalty so the funds must be essentially forgotten about for the duration of the term.
If for any reason the money must be withdrawn before the expiry of the term, there will usually be a loss of interest for anything up to around three months.
Having the money in an account that offers no automatic access means that it can be far easier to save and removes the temptation to dip into the funds for non-urgent spending.
Because the account needs little attention once up and running, it is a low maintenance way to save, with no need to constantly monitor markets and switch funds.
Another advantage is that the rate of interest is clear from the outset and will not change, making it easy to budget exactly for the amount that will become available upon maturity.
As a general rule, the longer the money is left invested the higher the rate of interest being offered is likely to be, but it is necessary to be absolutely clear that leaving your money tied up for the required length of time is possible before proceeding.
In the US, the equivalent fixed rate savings bond is the I Bond Treasury note, although it is also possible to purchase these types of bonds in a variable rate version too.
The fixed rate version is tied to an interest rate for the duration of the investment. The interest rate is announced in May and November annually and any bond taken out in that period is issued based upon that interest rate for the duration of its term.
Regardless of the term of the bond, the investment can be cancelled after 12 months but if the money is withdrawn before five years expires, there will be a forfeit of several months’ interest, usually around three months.
On an I Bond, interest begins to accumulate from the moment it is issued, with the money being added to the bond each month and payable when the bond is redeemed.
It is possible to purchase I bonds in $25 denominations with a maximum set at $5,000 per year and they are available not just in paper forms from banks but can also be purchased in electronic forms over the Internet.
Fixed rate bonds are a very safe investment and an easy way to protect you without risking any of the capital.