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I'm leaving my job soon to spend the next year career switching / experimenting / travelling etc. - being generally self-unemployed. I am planning to do odd jobs now and then, as well try some freelancing, but my plan is to primarily live of a bulk of money I have saved up over the last year and a half (sufficient for about further 9-10 months of life given no side work).

It currently lives in my bank's savings account which unfortunately doesn't match inflation with its interest rates. I want to change that. I do not need immediate access to this money, what I need is the option to withdraw small quantities every month or so, depending on how much or how little I made with my odd jobs.

I'm in this awkward position where I can't do a full frozen long term savings even for one year, because I will most definitely need an access to this money before then. On the other hand letting it sit in a rubbish Cash ISA seems like a waste because it's not working for itself and only decaying slowly with inflation. I'm not sure what my options are (here in the UK) and would appreciate any advice!

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    Unfortunately there is a trade-off between liquidity, risk and return. For money that you need to use within a year I think you are going to have to give up returns to minimize risk ad maximize access to your money.
    – JohnFx ♦
    Jan 30, 2017 at 18:28
  • @JohnFx I am aware there are trade-offs, I asked my question in order to work out what kind of action gives me the best balance of liquidity / return in my situation.
    – Sanuuu
    Jan 30, 2017 at 18:36
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    Are you willing to take small risks, with the backup of being able return to work earlier if you get unlucky?
    – GS - Apologise to Monica ♦
    Jan 30, 2017 at 18:42
  • @GaneshSittampalam Yes.
    – Sanuuu
    Jan 30, 2017 at 18:43

3 Answers 3

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To begin with, bear in mind that over the time horizon you are talking about, the practical impact of inflation will be quite limited. Inflation for 2017 is forecast at 2.7%, and since you are talking about a bit less than all of 2017, and on average you'll be withdrawing your money halfway through, the overall impact will be <1.3% of your savings. You should consider whether the effort and risk involved in an alternative is worth a few hundred pounds.

If you still want to beat inflation, the best suggestion I have is to look at peer-to-peer lending. That comes with some risk, but I think over the course of 1 year, it's quite limited. For example, Zopa is currently offering 3.1% on their "Access" product, and RateSetter are offering 2.9% on the "Everyday" product. Both of these are advertised as instant access, albeit with some caveats.

These aren't FSCS-guaranteed bank deposits, and they do come with some risk. Firstly, although both RateSetter and Zopa have a significant level of provision against bad debt, it's always possible that this won't be enough and you'll lose some of your money. I think this is quite unlikely over a one-year time horizon, as there's no sign of trouble yet.

Secondly, there's "liquidity" risk. Although the products are advertised as instant access, they are actually backed by longer-duration loans made to people who want to borrow money. For you to be able to cash out, someone else has to be there ready to take your place. Again, this is very likely to be possible in practice, but there's no absolute guarantee.

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Money you need in the next year should not be invested. It should be in a cash-equivalent account such as a savings or money market account. You might be able to construct a CD ladder but it probably won't be worth the effort.

If, per the comments, you don't mind returning back to work sooner than a year, then you could invest the money. You could, for instance, invest in stocks, bonds, and mutual funds which are generally quite liquid and can be sold at a moment's notice. They could drop quite dramatically with little notice, but still should be quickly salable.

However you should definitely still keep enough in liquid savings to cover the period before you started working again. This includes the time to find a new job, start, and receive your first paycheck. But it also includes whatever time would be needed to extricate yourself from your current activity, e.g. if you are traveling, enough time to conclude your travels and get back to your home country. You would have to regularly sell a portion of your investments in advance so that your liquid savings account always contains at least the minimum amount above.

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Peer to peer lending is, at the moment, a good tool to beat inflation but it is not risk free.

In order to avoid losing money with p2p I only pick the less risky loans. Information on how to select loans are easily available throughout the web.

Most people fail here and search for the maximum yield, no matter what. Then some loans will default and, even if most platforms take care of the debt collection, you will wait for long time to have your money back.

UK peer to peer appear to be very solid, but yields are rather low these days.

Some eastern European p2p tools are better but more "difficult to use". The difficulty comes from the automatic investment systems included that normally make you buy also crap loans.

Since you live in the UK you can take advantage of IFISA, so probably you have little or no reason to risk more on loans abroad, if not for a tiny slice of your capital.

Also consider social lending as a mean of producing "compound interests". After a few years you will benefit a lot from it, even if your question is not about long term, if I am not wrong.

Bank savings is necessary but it is not a mean to build wealth lately...

Government bond are also to avoid for now.

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