The world of saving can seem a bit complicated when we’re bombarded with all the different types of savings account. They all have different rates with confusing clauses. We’ve decided to make your life a whole lot easier with this guide to saving which explains (in a language you can understand!) what you can do with your savings and how to get the best account for your needs to make the most of your money.
- NEW A savings update
- What accounts are out there
- The golden rules to saving
- Sneaky tricks that banks use
- Find the right account for your needs
Savings accounts are certainly looking in better shape than this time last year with an increase in interest rates across the board – particularly in the case of long-term bonds where stiff competition has pushed rates over 5.00% AER – but they are still a far cry from the pre-recession rates. The problem, however, is that fixing for a long time carries a lot of risk. Locking your cash away for four or five years could mean that you miss out on better deals if rates pick up and have no way to move your money until the end of the term. With a Bank of England base rate still at a mere 0.5% interest rates can only really go one way – up! Therefore, if you are going to fix, it may be prudent to opt for no more than two years, to avoid missing on higher rates down the line. Also, beware of bonuses – these can make a rate seem far more impressive than it perhaps is – but again, if you’re savvy it can work in your favour – simply make sure you switch to a better account once the bonus period ends. Another issue is that many of the best deals are being snapped up within days. This shows that if you see a great deal it’s a good idea to get in there quick – or risk losing out – although some caution is recommended with accounts that require very large deposits. Instant access accounts may be a better option for some people, but remember that a variable rate can change at any time. This means that you need to be on the ball, and make the effort to switch to a better account if the rate on your account falls. The whole point of an instant access account is that you can take your money out without penalty – so take advantage and grab the best rates. The main thing is that you don’t allow your money to sit around earning a pathetic rate when switching really is simple – a quick phone call and a few clicks on your computer and you could bag yourself a much better savings account.
Here’s a quick rundown of all the different types of savings account available – simply click on the titles to see our full articles on each of the savings options: Instant/easy access accounts: these are flexible accounts that allow you to take out money at short notice. Once upon a time this meant that you would have to accept a poor interest rate but these accounts now offer some really competitive rates. Saving bonds: fixed-rate savings bonds are like most other savings accounts except that you agree to not touch your money for a set amount of time. The “bond” could last for anything between six months and five years. Generally a savings bond will give you more interest than an instant access account. Also, although some will let you contribute during the account term, most bonds only let you deposit a minimum or maximum amount of money at the beginning as a lump sum and you won’t be able to add any more.
- Kent Reliance Banking Services are paying 3.5% on 3 year fixed rates, with an initial investment of £500 with a maximum total investment of £1,000,000.
- The Post Officeis paying 3.76% on balances of over £500 on a three year fixed rate. You cannot add or withdraw money after the initial deposit has been made, but you can close your bond if necessary, although breakage fees do apply. The Post Office also allows you to have 1 or 2 year fixed rate bonds with annual interest rates of 3.25% for a 1 year fixed bond, or 3.75% for a two year fixed bond.
Cash ISAs: an ISA works in the same way as other savings accounts except that you won’t pay any tax on the interest. There is currently a limit of £20,000 that you can put into a cash ISA in one year. Always check to see how long a particular rate is going to last for. There isn’t much point choosing an attractive rate that only lasts for a few months. If the interest rate does drop you have every right to switch to another bank or building society with a better rate. BUT, do not just take out the money then put it into another one because this will count as part of your yearly allowance. Instead, tell your current bank that you want to move your money to a new account and when you apply for the new ISA you can ask it just to be swapped into that account.
- With the Halifax Fixed Rate ISA Savers you can choose how long you want to lock your money away for – one, two, three, four and five year terms are available. The five year bond offers 4.4%, the four year bond offers 4.3%, the three year bond offers 3.7%, the two year bond 3.5% and the one year bond 2.25% on deposits of £500 or more. Withdrawals are not allowed.
Regular savers: if you prefer to put a bit of money aside every month, regular savings accounts are a great option. Because you must put a set amount away each month, you’ll be forcing yourself to start a very healthy saving habit, and get rewarded with a great rate.
- The Barclays’ Monthly Savings Account pays 3.25% AER for deposits of £20 to £250 a month. Crucially, you can miss any number of payments without incurring a penalty and withdraw money whenever you like (although you earn a lower rate of AER for any months you make a withdrawal).
Notice accounts: these only let you access your money when you give a certain amount of notice before withdrawing. The notice periods are anywhere between one and three months. If you don’t give notice you will usually have to pay a penalty and will lose interest. Some notice-based accounts may offer a bonus if you make no withdrawals at all within a year so do check.
- FirstSave has a 90 day notice account currently paying 2.5% AER. The minimum deposit is £100 for your interest to be paid annually (unless your initial deposit is £5,000 then you have the option of monthly interest).
Children’s accounts: these work like ordinary savings accounts but they tend to offer better rates so it could be a good idea to open one. Ask for a Form R85 when you open an account so that the interest is automatically tax-free. Any money put into the account by a parent that generates interest of more than £6,475 a year will be treated as parental income and will result in that parent paying tax on it.
- Halifax has a Children’s Regular Saver account with 6% AER. You do need to save between £10 and £100 every month and cannot make any withdrawals.
Here are the golden rules to saving that you need to follow before you even consider putting any money aside: Rule 1: Pay off any old debts. The amount you are charged in interest for debts will almost certainly be more than any interest you could make on your savings so use any money you have to pay off debts first, then start thinking about savings accounts. If you are in debt now find out how to beat your credit card balance and read our step-by-step guide to getting out of debt. Check that you’ve got the best current account. So few people switch their accounts and they really should! Rule 2: cut your living costs Firstly cut down your essential bills each month. Use the Moneymagpie comparison tables to find cheaper insurance (on everything from you car to your travel), cheaper utilities and cheaper banking. Then always make sure you’re getting the best price for anything you buy by using price comparison sites like these:
- My Supermarket
Rule 3. Make some extra cash Go to our making money section for loads of ways to make extra cash quickly and easily. There are ideas to suit everyone so you’re bound to find something for you. Rule 4. Set up a safety net Start putting money regularly into a high interest account which will be your ‘safety net’ savings. Keep saving there until you have enough to cover you for three to six months if you don’t earn anything. You can set up several savings accounts – one for each thing you are saving up for. See our article on savings pots for more advice.
Watch out for … Interest being paid into a different account: there are accounts out there which offer an attractive rate, but some pay any interest into a separate account which means that you cannot earn interest on the interest you make. Find out BEFORE you open a new account and if this is the case then switch to one that doesn’t! Changing rates: companies will often drop their rates without warning you so it’s extremely important to keep an eye on them. Check our savings article each week to see which accounts have the best rates. If your bank does drop the interest rate make sure you move to a better account. Bonus rates: one trick that many banks will use is to include a bonus rate for a set period, (typically six months or one year), to make the interest rate seem more attractive than it is. Once the bonus period is over the rate could drop so take this into account when choosing. Unfortunately banks don’t have to write to you when the bonus period runs out so you do really need to find out before you open any account with a bonus rate. Hidden charges: some banks may offer you easy access to your money but you end up losing interest in any month in which you make a withdrawal. Free gifts: be very wary of accounts that offer you exciting free gifts because they usually offer them to hide the fact that their interest rate is low.
Take tax into account when calculating how much you will make on your savings. Any money you make on your savings will be taxed by the government so the interest rate you see is usually not quite the amount of money you will make in the long-run. Don’t forget that you can put £5,340 a year into your cash ISA. Also, if you have more than £50,000 in savings it’s a good idea to split your money into different accounts with different banks because only the first £50,000 of your money is fully covered and refundable if the bank goes under.
- If you want easy access to your savings…
Get a flexible account that allows you to take out your money easily and without losing interest. Don’t forget to set up one account just for emergencies. Some of these accounts even come with a card that you can use to get money out from ATMs 24 hours a day. There may be a limit to how much you can take out though so do check to see that it’s enough to cover any emergencies.
- If you want stability for your savings…
Get a long-term fixed rate bond which keeps your money safe for years. The great thing is that you will know exactly how much money you’ll be making each year.
- If you’re undisciplined…
Get a notice account. These accounts don’t allow you to access your money unless you give them a certain amount of notice, so they force you into being disciplined about your spending and give you the time to think twice before you make a big purchase and dip into your savings.
- If you have a lump sum which you don’t need to access…
Put the first £5,340 of your cash savings into an ISA-wrapped account. Then put the rest into a savings bond.
What saving a tenner a week would do…
Just to show you the value of investing even a small amount of money each week, here is a video that Jasmine has done about what you could get from putting away just a tenner a week.