Just about to sell my house and start renting for 6 months to a year in a new area, when I intend to buy another home once I am satisfied I actually like living there.
I need to tie up the proceeds of my current sale so that I can't easily get at it, but I will need it when I come to buy again.
Can anyone recommend a home for about £70K that will make it hard for me to dip in, give me some growth via good interest or something, and be available when required - I figure that it will take at least a month or
2 to get a sale through when I am ready to buy, so instant access isn't needed (or advisable!)
I want to keep the cash as one lump and not spread it about between different places if possible.
here's a good place to look for savings accounts....
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The accounts that come up are...
UNIVERSAL BS Tracker Two
5.5% 120 day notice
STROUD & SWINDON BS Branch Premier Account
5.5% easy access
ALL&L Online Saver
5.35% easy access
AUTOA Internet Savings Account
5.31% Easy Access
If it were me, I'd ignore the notice accounts and give the bank books to my family if I really couldn't trust myself not to spend the cash! Then I'd split the money between the other 3, which would put about 23k in them. The reason being, there is a limit above which if the bank goes bankrupt you don't get your money back, you get roughly 90% of the first 20k. That isn't quite right, (cause I've forgotten), but it's close enough to give you an idea. As such you should never really deposit more than 20K with one bank.
But, if you want to shove it all in one, go for the STROUD & SWINDON building society at 5.5%, that should bring you in 250 after tax each month....not a bad little earner.
It's all just a case of risk & reward - and don't forget that spreading money across more than one bank actually *increases* the chance of losing money! [Any one of the multiple banks could go under.]
For the purpose of running some numbers, let's assume: (a) if a bank went under you'd get back 100% of the first 2000, 90% of the next 33,000, and none of any excess; (b) the chances of any one bank "going under" is 1 in 10,000 (re-run the figures with your own estimate); and (c) the highest-paying account (which you'd put money into) pays 5.1%pa interest (Bank A), and the next highest pays 5.0%pa interest (Bank B).
Let's work out how much you'd have at the end of the year - if you put 70K into Bank A's a/c :- 99.99% of the time you'd have 73,570. 0.01% of the time you'd have 31,700. Hence the "average" (expected value) = 73,565.81
Alternatively, if you put 35K into each of Bank A's a/c & Bank B's a/c :- 99.98% of the time you'd have (36,785 + 36,750) = 73,535. 0.01% of the time you'd have (31,700 + 36,750) = 68,450. 0.01% of the time you'd have (36,785 + 31,700) = 68,485. Hence the "average" (expected value) = 73,533.99
On the average, you'd be 31.82 **worse-off** by spreading the money across the two a/c's!! In other words, putting all the money into Bank A would be a little more
*risky* (you might only get back 31,700) but will likely provide a greater
*reward* (you're more than likely to get back 73,570).
Well, you're right of course, but the purpose of spreading the risk isn't to limit your expected loss, but to limit your worst case loss.
You forgot to go into the possibility of both banks going under. Your assumption of an independent small risk of either going under would make the risk of both going under infinitesimal, but the assumption of independence must be questioned.
Although banks do go down for random reasons, it's conceivable that common causes will zap the independence, so that if the risk of any one bank going down is 10^-4, chances are the risk of any two going down is very much higher than 10^-8.
Yeh, deliberately - the difference to the numbers got too small! [99.980001% / 0.009999% / 0.009999% / 0.000001%]
"Ronald Raygun" wrote
Agreed - but then that makes my point even stronger.
The expected value (average) at the end of the year would be the same if all money was in one bank (73,565.81). If the money was spread across the banks, with the risks of the two banks not independent, then the expected value (average) would be even less than the 73,533.99 shown above, and there'd be even more reason to keep it all in the one (highest interest) bank!!
This is more of an argument against putting dosh into accounts paying a lower rate of interest than against spreading your risk. Note that losing
0.1% interest on £35k should lose you exactly £35, yet your figures show you'd expect to be *only* £31.82 worse off. I'd say this shows that spreading the money around actually gives a *benefit* worth over £3. So if thinking about spreading, it's worth trying to ensure both banks pay the same optimal rate, but when this isn't possible, consider the lost interest the price to pay for your "insurance premium" against losing half your capital if the only bank goes down.
Agreed, but the worst case result would be £31,700, whereas if the money were spread over two banks, the worst case result would be £63,400.
You're saying that because the risk of a house (worth £200k) burning down is 0.0001 and the insurance premium is £300, then if you don't insure it, 0.9999 of the time you'll still have the house and the premium (£200,300) and 0.0001 of the time you'd have just the premium (£300), expected result: £200,280. Yet if you do insure it, then 1.0000 of the time you'll have either the house or a replacment of equal value, so the expected result would be £200k. So on average you're £280 worse off if you insure.
No. If the risks are independent, this means that the probability of either bank going down is .0001 irrespective of whether the other bank goes down. But if not independent, let's exaggerate and say that if A or B goes down, then the probability of the other one following it before you get a chance to draw your money out in cash rises to 50%.
This would give us the following probabilities:
0.00005 A goes down and B survives: 31700+36750h450 => 3.42
0.00005 A goes down and B follows: 31700+31700c400 => 3.17
0.00005 B goes down and A survives: 36785+31700h485 => 3.42
0.00005 B goes down and A follows: 31700+31700c400 => 3.17
0.00000001 Both die independently: 31700+31700c400 => 0.00
0.99979999 Both survive: 36785+36750s566 => 73551.10 Expected overall result: 73564.28, some £30 more than yours.
Whoooops! You sly old dog, you! Did you think I wouldn't spot your mistake? ;-)
36785+36750 is actually 73535, not 73566 !! Hence use 73520.29 rather than 73551.10 ...
"Ronald Raygun" wrote
Nope - it's really 73533.48, some 0.51 **less** than the independent scenario - just like I said! [OK, 51 pence isn't much -- but I didn't say it would be a *lot* less!!]
The point stands, that the loss is the result of the lower interest rate on the 2nd account. Had the two accounts had the same interest rate, the expected average result would have been £3 better when spreading than when not. This is really good: Paying a *negative* insurance premium for the peace of mind of increasing the worst case result from 31700 to twice that.
There's also the possibility of the B-account having a *higher* interest rate instead of lower. This would happen when you already have the whole balance in the A-account, and as a result of deciding to spread the risk you go out and search for a reasonable alternative and find one that's not only (almost) as good but actually better. :-)
Ermmm - the premium would be *zero*, not *negative*, wouldn't it? [Put the *same* 70K into both scenarios, get the *same* return at the end of each year in both scenarios (if banks don't go under) - no extra (nor less) paid for insurance.]
"Ronald Raygun" wrote
Higher than the "highest"? Now that's *really* good!!
"Ronald Raygun" wrote
Check back - the definition of my 'Bank A' was the one with the *highest* interest rate (not a "current one")! ["...the **highest-paying** account (which you'd put money into) pays 5.1%pa interest (Bank A)..."]
Well, yes, but the overall expected return takes into account the risk of one or both banks going under. Spreading increases the expected return. That benefit (of £3) can legitimately be called a negative premium.
Naughty! That may have been your definition, but you didn't state it, IIRC. You simply gave an example of one bank A having 5.1% and another, B, having
5.0%.
You didn't make clear you started from a position of having the £70k in a mattress (or non-interest-paying account) and then looking for the two highest-paying accounts you could find. And so it's not unreasonable of me to try to fit your example into an enclosing scenario where the decision whether to spread is made in the context of already having the whole sum sitting in the best account you had previously been able to find, and then going off to look for the best you could find excluding the one it's already in. Meanwhile the market could have changed such that the new search finds an account which is better than the one you had already.
Fair enough. The confusion arises between on the one hand a figure for the expected average outcome, and on the other hand the limited number of actual possible outcomes. In the expected average scenario there is no real premium paid, because it's not a real (or even possible) scenario, yet the bottom line is still £3 better *and* the worst case outcome is twice as good.
OK, if you want the "(which you'd put money into)" to be taken literally, in the sense that the money isn't yet in either of the accounts and has first to be put there, then that's clearly at odds with my interpretation of the scenario, that the money starts in a decent-paying account already and that deciding to spread risk would involve shipping some of it out to elsewhere. But it's also at odds with what you say below, that you're not starting from that position. There are, after all, not an awful lot of possible starting positions at all. Either the money is in a good account already or it isn't.
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