Two weeks ago, we saw the UK Government issue Bonds at a negative interest rate - remember my video about what Bonds are? (If not click here) Basically, it’s you loaning the UK government your money. Usually, in return you get interest as a bank or lender would. But not anymore.
But what does this actually mean?
Let's say you lend the UK Government £100 and in 3 years they give you back £99.
Yeah, you are effectively paying to lend your money out.
So what does this mean moving forward?
Well, there are a few things to take into consideration here - historically, bond rates have been higher than interest rates you’d get in a bank:
Bank: let me store your money, you’ll get 0.01% interest on it, but you can get it whenever you want.
Bond: lend me your money, I’ll pay you back 1% a year in interest. I’m trustworthy, so it’s very low risk, and then in 3 years you can have your money back.
On one side instant access, on the other, tie it up a little bit longer in return for more interest.
Will banks continue to follow that trend?
First of all, if you’re getting -0.03% on 3 year Govt Bonds are you gonna get -1% on your bank account? Because we all know when interest rates drop banks are very quick to pass that onto you and I.
Now this might sound crazy to anyone from the UK: paying to have your money sat in a bank, but Germany and Japan have been doing this for years.
So basically, if you put £100 in a bank account today, in a year it’s worth £99. Year after £98. Year after that £97, so on and so forth. It gets even worse if you take inflation into account.
Let’s say you’ve saved up £50,000, and you’re getting a negative interest rate of -1% and inflation is running at 2.5%. Your £50,000 nest egg in 5 years in now worth £42,000.
"If my Bank did that I’ll just close the account".
No you won’t, have you ever heard the analogy of how to boil a frog? It’s gonna happen gradually, not to mention if one bank does it they’ll all follow suit, what are you gonna do then? Buy a good safe?
If you want my honest opinion, this is coming, first the Bank of England will make their interest rate negative, which is the rate that banks lend to each other at, then the high street banks will follow suit and the minute the first one does it, it’ll be like falling dominoes.
Now tell me it’s safe keeping your money in the bank.
Let me know your thoughts in the comments? Do you agree? And when this happens, where will you be putting your life savings?
Thanks for reading,
Comments