How can I make my money grow when interest rates are so low?

“Devastating, that is the effect that low interest rates have had on our income.” This quote shows that the impact of low interest rates is real, not some arbitrary number that may or may not be higher from another bank. Another recent quote from a client is “I am trying to build a pot for my retirement but interest rates will be low for the rest of my working life”.

Arguably, the person above who is still working has the chance to do something about the interest rates. For the couple from the first quote, they had been used to an income of 11,000€ pa from the interest on their bank accounts. When interest rates fell, so did their income to just 2,000€ pa. The Interbank Rates Chart from the Financial Times shows why; interest rates are minimal.

What is also becoming clear is that this situation is not likely to change soon. The outlook is for continuing low interest rates. These charts show the prospects for interest rates in the Eurozone, Sterling and Dollars.

euro yield curve
uk yield curve
us yield curve

There are two aspects to all of these graphs. Firstly, the length of time before there is any increase in rates, from six months in the US to two years in the Eurozone. The second element is that when rates do rise, the amount of increase is expected to be small. To be fair though, we believe these graphs to be artificially depressed by the money printing or QE that has taken place in each of the three currencies. However, the charts do give an indication of the timing of interest rate rises and the overall trajectory of rates.

How to improve your income and investment return
Here is a strategy that will help overcome very low interest rates. Firstly, there is no alternative to a bank account for some of your money. If you have planned expenditure then leave this money in the bank. Typically, this would be for a car, cruise or even perhaps a wedding just as some examples. Add to this an amount for an emergency fund. The amount will vary depending on your circumstances but three months of your normal expenditure is a good guideline.

Why do you need to leave money in the bank for these purposes? It is because other forms of investment often need to be allocated for the medium term. And unless you are simply lucky, money put into other investments needs to be allowed time to grow.

Are there alternatives to bank accounts? Yes, there are many alternatives. Do they work in the same manner as a bank account? No, they do not. This is why they can provide a better return on your investment. For this type of investment, do not put all your eggs in one basket. You need different types of investments (different asset classes) to give you diversification. Stick to the basics such as top quality fund management names. You do NOT need to be investing in rainforest woods, bitcoins or oil exploration companies that are about to discover hidden reserves (examples we come across regularly).

The outcome of a diversified portfolio will make a big difference to you, whether you are seeking income or capital growth. A 200,000€ investment with a return of, say, 5% would produce 10,000€ per annum. Not quite the 11,000€ that you may have been used to but certainly better than leaving it in the bank!

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