Where Should You Put Your Money?

The credit crunch is on everyones lips, and for many families and businesses, times are getting hard. There has been a great degree of uncertainty throughout 2008, but when the Lehman Brothers investment bank collapse in early September, people quickly realised that the credit crunch was far from over. In fact, things got even worse in the aftermath. The banking system now looks in a worrying state; with an almost complete stop on inter bank lending, government bailouts and Icelandic banks going insolvent. In this climate, many people are now asking where exactly should they put their money?

Why shouldnt I withdraw all of my cash?

Despite all the uncertainty about the British banking system, putting money in a savings account is still the most sensible option for savers. The government has stated that it will do whatever is necessary to uphold the banking system, and the chances of a high street bank collapsing without government intervention is slim to none. Taking your all of your cash out of an account and putting it under your mattress is far less safe option than putting it in a savings account. Not only will you leave yourself open to potential robbery, but also the value of your money will deteriorate against inflation without an interest rate. At the current inflationary rate, keeping hold of the cash outside of a bank will make your money worth around 4% less by this time next year. Meanwhile, by putting your money in a bank with an interest rate of 6%, your money will be worth 2% more in real terms next year.

But what about the Icelandic banks?

Whats happened with the Icelandic banks is a fairly unique situation. Their business models were very high risk in comparison to banks in the UK. Though Landsbanki, which owned Icesave, has all but collapsed, all the money deposited by savers in this banks will be returned in full through the government Financial Services Compensation Scheme (FSCS). Meanwhile, for savers depositing with stricken bank Kaupthing Edge, its business as usual, because ING Direct have taken over these accounts. While undoubtedly a stressful time for savers with these banks, they will see their money again. In the case of Icesave, the FSCS is working hard to pay depositors in a matter of weeks rather than months.

So Wheres the Safest Place?

Its quite true that UK banks are safe from collapse, because the government is prepared to nationalise them if they run into trouble. So far Northern Rock, Bradford and Bingley, HBOS, RBS and Lloyds TSB have undergone a degree of nationalisation them in order to steady the ship.. All of these banks are now extremely safe to deposit with. Meanwhile, HSBC has not been rocked as hard as these banks, but its savings products give low rates. One of the best savings accounts currently on the market is with Alliance and Leicester, with rates of 6.6% on their eSaver. Spanish giant Santander has also recently strengthened their position in the market thanks to a buyout.