Mattresses were designed to be slept on, not for storing money. There are many different types of savings account available today in the High Street, where your money can be stored in a safe manner, earning you interest at the same time. Deciding on which type of savings account to use can be a daunting task, so let’s take a look at some of the most common ways of saving your money.
In this article about savings accounts we shall examine:
- What savings accounts are good for
- Some reasons to save money
- How your savings are protected in the UK
- Whether tax is paid on savings
- The different kinds of savings accounts available
- How these accounts can work for you
Saving money for a rainy day
Most of us have been taught since we were small children the value of saving money. It probably started with a piggy bank, that was lovingly filled with coppers and emptied out on a rainy day, providing some extra cash to buy something that was desperately needed. In the real world it can sometimes be a little bit harder to put money aside, once all the bills and other necessary expenses have been dealt with. There are many benefits to setting aside some money before you spend any, even if your income is small.
Savings accounts are for short term spending goals
Learning about and understanding the different types of savings accounts that are available, will help you make an informed decision on where to put your hard earned savings. By putting your savings into a savings account it will be kept away from temptation, but you will still be able to access it in case of a disaster, or other reasons. Many of these accounts do not have penalties for withdrawing funds early or if they do, they are not excessive.
Dreams and goals are achievable with a little money
Expectations for the future, dreams and goals, are vital for our well being. Achieving those goals can provide a reason to keep up the fight and set higher standards, all achievable over our lifetimes. In order to reach these vital goals, you are probably going to need some money. It could be a dream holiday with your family, a new, shiny car or your own home. By saving money wisely, you will put yourself on the path to getting the things in life that are important to you and your family.
Protect yourself from life’s ups and downs
One of the biggest causes of stress is money, or rather lack of. According to medical experts, stress related illnesses can be physical and mental and affect almost all of us over our lifetime. Unforeseen disasters can strike any of us at any time and being unprepared for these can cause debt and worry. Boilers break down, cars and appliances need replacing and illnesses can cause unemployment. By having some cash set aside, these kind of unfortunate circumstances will be a lot easier to deal with.
Saving for a better retirement will make your life happier
A state pension is not a huge amount of money to be able to live comfortably on. Who knows, in these uncertain times, if there will be any money left for state pensions in the future? By putting some money away every month in a long term, high interest account, you will be able to sleep easier knowing that when the day comes that you will be unable to work, your future will be a little bit more secure. Saving money could also allow you to retire early and quit the stresses of the workplace, enjoying your life while you are still young.
Do you worry that your savings are unprotected in a bank?
Putting your money into a savings account is one of the best places that you can store it. Banks and building societies, that are regulated by the Prudential Regulation Authority, are protected by the Financial Services Compensation Scheme, (FSCS).
The limit on the amount of savings that are protected by the FSCS is 85,000 pounds, or 170,000 for a joint account. This amount is per authorised firm and you should note that some banking brands are part of the same authorised firm. If you have more savings than the maximum amount with the same bank, or authorised firm, then it may be worth moving the excess to another savings account.
Will I have to pay tax on my savings?
The personal savings allowance was introduced in the UK in April 2016. This allows savers to save a certain amount of money each year tax free. If you pay basic rate income tax on your earnings, this allowance allows you to earn up to 1,000 pounds of interest, tax free. For those who pay 40% tax on their earnings the amount is reduced to 500 pounds. Taxpayers who pay by additional rate are not eligible for this allowance. Interest from savings will be paid in gross, which means that banks or building societies will no longer deduct tax from your interest.
What have we learned so far?
- It can be difficult to find extra cash to save
- Savings accounts are great for saving money for short term goals
- Save money to achieve and get the things that you want in life
- Having some saved money will cause you less stress in case of an emergency
- Saving now for retirement can stop you worrying about your future
- Savings banked with UK regulated banks are protected by the FSCS
- The personal savings allowance allows a sum of money to be saved tax free every year
What are easy access savings accounts?
Easy access savings accounts are very similar to checking accounts, except they do not have the check writing facilities that a current account offers. Almost every bank offers these savings accounts that are very easy to open up either in person, over the telephone, or on-line. These kind of accounts are extremely simple to set up and maintain. By having an easy access savings account you can deposit money into a safe place, where it can be available for any kind of situation that could arise in your daily life. These kind of accounts are a great way of easing financial worries by making sure that a sum of money is available in case of something unexpected.
Easy access savings accounts usually require a larger amount of cash to open as opposed to a current account. These kind of accounts are designed to work together and can be easily linked, allowing you to transfer money simply between the two. This is a great way to manage your day to day finances but these kind of accounts typically have low interest rates. If you were looking to make more money from your savings, then you would be better off choosing a different, more powerful account.
Questions on savings accounts
A savings account is an account at a bank, building society, or credit union that pays interest on your deposited money. It’s a worthwhile and relatively low effort endeavour to make more money based on the interest paid by the bank. Certain current accounts may offer attractive interest rates, however these come with more terms and conditions attached compared to savings accounts.
If you are looking to switch savings accounts to make the most of your savings, you should be aware of the notice period on your present savings account, in order to avoid any fees associated with withdrawing your amount prematurely. Your new savings account may offer higher interest rates, but may not be worth moving your money to if you are subject to high fees for withdrawing from your previous accounts.
In the UK, the minimum age for someone to be able to open a normal savings accounts is 18. However, for those aged 16-18, there may be a cash ISA option available by some banks. There types of accounts are specifically aimed at teenagers and children.
What are money market accounts?
A money market account is a mix of a current and savings account, as it offers features similar to both. These accounts used to be known as money market deposit accounts. You can draw checks against this kind of savings account, meaning that you will always have access to your money, but depending on the bank that you choose to invest in, there may be some limitations to these withdraws. Money market accounts offer a higher annual percentage yield than a regular savings account.
Interest rates are linked to money market interest rates, so the savings can be higher than a normal savings account. These kind of accounts are favoured for short term savings and are considered low risk as the banks tend to invest in safe, secure investments like government bonds. These kind of accounts will require a much higher minimum deposit than a regular savings account.
How do cash ISAs work?
Cash ISAs, otherwise known as individual savings accounts, allow the user to earn tax free interest on saved money. The limit that you can put in a cash ISA each year is currently 20,000 pounds, that may consist of cash and shares. Once you have exceeded this limit you may want to look at a different type of savings account if you have more money to save. The terms of cash ISAs will differ, depending on the financial institution that you choose to save with. You will have to choose the type of ISA depending on your individual needs.
There are types that allow you greater access to your cash, called instant access ISAs, and fixed rate ISAs that are good for when you have a lump sum to save. Each tax year, only one provider can be chosen to have a cash ISA with. An ISA can be opened by UK residents aged 16 or over.
Notice savings accounts
Notice savings accounts used to offer higher interest rates, but this is no longer always the case, so it is a good idea to check all of your options before opening one of these accounts. If you could get the same rates of interest elsewhere, then it would not make sense to restrict access to your cash. When you are saving money in this kind of savings account you will have to notify the provider when you need to withdraw money.
Some accounts will demand that you notify them 30 days ahead, in some cases it may be 60 days or even 90. This would be restrictive if you think that you may need to access your money unexpectedly. If an emergency withdraw were made from a notice savings account then you could lose some interest. Interest rates on these kind of accounts are usually variable interest rates, so it is a good idea to check these rates regularly to make sure that you are getting the best value for your money.
Regular savings accounts – Are they worth it?
Regular savings accounts are great for people who are just beginning to save, or for others who want to drip feed an account with a deposit every month in a disciplined manner. Part of the deal will be that regular money is deposited into the account every month, without fail. These kind of accounts may have limitations on the amount of times per year that cash can be withdrawn, so they are not advisable for those who wish to have savings in case of an emergency.
Regular savings accounts are great for people who are just beginning to save, or for others who want to drip feed an account with a deposit every month in a disciplined manner.
Regular savings accounts sometimes have a limit on the amount of money that can be deposited every month, which prevents the user from being able to deposit any extra cash. These accounts offer great interest rates, but you must remember that interest is paid on the sum as it builds up, meaning that the first years interest payment would be calculated on the low amount that was in the account at the beginning. If you had a lump sum to deposit, then you would be better off putting it else where.
What are fixed-rate bonds?
A fixed rate bond savings account offers a fixed rate of interest over an agreed period of time. These rates will be higher than most other types of savings accounts, but you will not be able to access your money for the duration of the agreed time. The longer that you agree to lock your cash away for, the higher the interest rate will be. There are different time scales available from one, to five years, or even longer if you choose.
In order for this type of account to work for you, you have to be sure that you will not need to get your hands on your cash. You will be able to get to your funds in case of an emergency, but you will incur heavy interest penalties. If you deposit your money just before a rise in interest rates then you will not be able to benefit from this, as the rates are fixed. Many accounts require a large deposit and do not allow you to deposit more savings over time.
How do the new “Help to Save” accounts work?
This is a new government scheme designed to help people create savings accounts. It is due to be implicated no later than April 2018. It is hoped, that by providing cash incentives. People will be encouraged to save more money. It will be for workers receiving working tax credits or universal credits to help them save a maximum of 50 pounds a month for a period of two years, at the end of which they will receive another 50% of their savings, a maximum of 600 pounds.
After the two years, they may choose to carry on with the scheme and will be able to get another 600 pounds maximum bonus if they continue to save as before. Withdrawals will be permitted to cover any emergencies, and there will be no restrictions on what people choose to spend their savings on.
What conclusions can we draw about savings accounts?
By shopping around, you will be able to find the perfect savings account for your individual wants and needs. It is surprising how soon your savings will grow into a nest egg that can be used to enhance your life in a positive way.