Premium Bonds Or Savings Accounts The Choice is Yours
Poolside at the resort.
There will always be artifically connived controversy about everything including premium bonds and if they are really worth the investments. If you calculate the odds of winning per bond and the interest rates for regular savings accounts, the argument could go both ways. On the positive side a premium bond gives the saver a chance to win over a million pounds if they are the two lucky numbers picked during the monthly lottery. The flip side of the coin is that there are thirty six billion loser bonds each month. Their money stays the same, it does not loose its value except through inflation, but there is no interest to generate profit. So the government, in all actuality, is using thirty six billion pounds worth of British money for free.
People who are skeptical about premium bonds contend that the reason the odds are so against the majority of the investors is that the distribution is skewed by the way it awards the prizes. This would allow for the majority of the investors to have little to no chance of winning a cash prize. Their earning potential of their money would actually decline because they would not be earning the interest rate in a regular savings account or the rise of the earnings if the money was wisely invested in stocks.
Once you get past the dazzling hope of winning a million pounds then you can look at premium bonds for what they are. A fun way to save money and at the same time you can have the excitement of winning the lottery. It’s the same as getting a free lottery ticket for each bond per month. To look at winning backwards suppose that one million people put in one pound apiece for the lottery. One person would win the million pounds, but there would nine hundred and ninety nine thousand and nine hundred and ninety nine people who would be losers. Those people would have at least made a small percentage on their savings. It’s a choice between a chance for something big or a small interest to give you the satisfaction of profit.
Another way of looking at it is to look at the interest rate of a premium bound. The interest rate of four percent is the estimated payout for your one pound bond. The government uses the interest to create the prize bank and to allocate the prizes. So you would expect to win four pounds on a hundred pound investment. This is impossible because the smallest prize is twenty-five pounds. It would take around seven investors to loose their interest for that month if you won those twenty-five pounds. Even more people would lose their money to finance the two million pound give away to two winners.
What are the premium bond prizes? Recently, the total prize amount for premium bonds was £96,395,075. The prizes are bundled into higher value (£5,000 to £1-million), medium value (£500 and £1,000) and lower value prizes (£25, £50 and £100). There are around 3.3 million prizes in total every month.
There is simply choices in the ways you should best invest your money and that choice is yours. Lotteries always provide hope for a better life even though you know in your heart that winning is a very long shot. Savings accounts provide security both financially and emotionally because you know that you will get a return on your money. It is just a manner of tastes and where you feel more comfortable assuming you only have the two choices of a Premium Bond or bank savings, where a wealthier person may also consider stocks, bonds, commodities, gold, silver, artists’ body of work, coins, gems, art, land, etc. Naturally when one has enough cash on hand to divest between multiple investment strategies then Premium Bonds may have a place in your portfolio.
