Five ways you lose money in bed

The age old practice of stashing savings under the bed has returned in the wake of the recession. But opting for your bed over an account could be costing you money.

What do you trust more; your bed or your bank?

A strange question, but one that many people are asking themselves when deciding on a place to keep their savings. And unfortunately for the banking sector, many are choosing to stash their extra cash under the bed instead of going for a savings account.

According to research by the Financial Services Compensation Scheme (FSCS) there’s more than £7 billion stashed in homes across the UK. This return to ‘mattress saving’ has been triggered by a loss in confidence in the financial services sector following the recession.

But by opting for your bed over your bank you’re exposing your hard-earned cash to rising prices, as well as missing out on interest. Let’s take a closer look at five ways you're losing money by stashing cash under your bed.

Inflation

The main threat to any cash you have hoarded away under your bed is that of rising prices – in other words, inflation. As we reported last month, the Retail Price Index (RPI) shows that inflation has now ballooned to 5.1%. These rising prices are eroding the spending power of any savings you have that are not earning interest.

But fortunately there is now a way of protecting your nest egg from rising prices by using an inflation-linked savings product. The Post Office’s Inflation Link Bond is one such account and is available until the 27th April.

This bond earns interest at 1.5% above the RPI reading taken in April every year and pays out a lump sum at the end of a five-year fixed term. So if RPI stands at 5.1% when the first interest rate is calculated in April next year, you’ll earn 6.6% on your savings for the year.

That means if you’re a basic rate taxpayer and RPI stays below 6%, you’ll beat inflation, even after income tax is deducted! Read Take this chance to earn 6.6% on your savings for some more information on this account and a Yorkshire Building Society account that offers an inflation linked, tax-free return.

BM Savings is also offering a five year bond that again pays out at 1.5% above RPI, but you’ll need to get your skates on if you’re after this account issue as it closes for applications on the 10th March.

Locking it up

If you don’t fancy squirreling your money away for five years (read Base rate set to rise by May for one reason why) then you may be better off using a regular fixed term savings account. You won’t beat inflation by using one of these accounts, but you will earn interest – making you richer than if you stashed your cash under the bed!

Here’s a table with some of the best deals for one, two and three year fixed term accounts:

As you can see, if you’re prepared to lock away your cash for three years you’ll be able to earn a pre-tax return of over 4%.

But there is a way to earn even more than this, and have instant access to your cash...

Easy access

Strangely enough the highest paying, direct access deal for your savings is actually Santander’s new preferred current account! Yes, I know it’s Santander, and many of you have issues with this Spanish giant, but you really can’t grumble at a 5% interest rate on easy access savings up to £2,500!

To be eligible for this rate you will have to pay in £1,000 every month and switch over two direct debits or standing orders. Find out more about this new deal by reading New 5% current account with free overdraft.

If you really don’t fancy switching to Santander, Halifax is also offering £5 per month cashback on their Reward Account – but again you will need to pay in £1,000 every month. Alternatively you could just go for a regular direct access savings account; here are some of the best deals around at the moment:

But it is worth pointing out that if you do go for the Nationwide or Santander savings accounts you should look to move your savings after a year as the headline interest rates both include 12 month bonuses.

Tax free returns

Another way you can make money off your savings is by shovelling it into a Cash ISA – this way you’ll avoid paying any income tax on your interest payments. Every person over 16 currently has an annual tax-free Cash ISA allowance of £5,100 (this is set to rise to £5,340 for the next financial year) but if you haven’t used all this up by 5th April, you’ll lose it!

The good news is that the ISA market is currently looking fairly competitive as the pre-April 5th ‘ISA season’ hots up. Head over to There’s 34 days left to save £££ to read about the best deals around at the moment – but remember there’s now only 28 days left until the financial year closes, so you better get moving if you are after an ISA!

Social lending

If you’re still dubious about going anywhere near a financial institution after the mess they landed us all in, then a new social method of getting a return on your savings may be up your street.

Sites like Funding Circle, Zopa and Quakle have sprung up in recent times, offering you the chance to lend money direct to other people or businesses. What’s more, the rates of interest you’ll earn on the cash you lend are pretty competitive!

Funding Circle boasts that their members collectively earned an average rate of 8.3% (before fees and taxes) in the site's first six months of trading, while Zopa’s average lender interest rate over the last year is 7.6% (after fees). But neither of these figures account for any losses or bad debt which – though fairly uncommon – are obviously a drawback to social lending.

All social lending sites will identity check, credit check and risk assess borrowers before allowing them to get at your money. Funding Circle (if you’re using their autobid tool) and Zopa also lend out your money to a variety of different borrowers, minimising the risk of a default.

But if you are planning on getting into social lending, you should still make sure you read all the terms and conditions and know exactly what risk you’re taking on before giving out any money.

More: Get a great savings account or ISA with lovemoney.com | Banks don’t know their ISAs from their elbows! | Top 10 ISA myths