Many people across the UK actively save money for one reason or another – whether to finance leisure spending like holidays or for more essential purchases like a roof repair. Whatever the reason you want to save, finding a suitable savings account can be tricky. In fact, it might not be uncommon for people to simply save the money in their current account, leaving it vulnerable to accidental overspending or even occasional temptation. Having a separate and dedicated savings account can help you to stay on track with your saving goal and may even help you get there quicker with incentives like interest, bonuses or even prize draws.
Fixed rate savings accounts effectively lock your savings away for an agreed duration. If you need to withdraw the funds before the end of the term, you often have to pay a penalty which may include losing all the interest you’ve earned so far. If you have some cash that you know you won’t need in the next few years, a fixed rate savings account may be a suitable option as the interest rate tends to be higher than easy access or regular saver savings accounts.
If you find there are often times you need money fast, then a locked savings account like this is probably not ideal as you won’t be able to access the funds when need them.
If you’re just starting out on your savings journey, then this type of account might be a good option. You can access the funds quickly and easily, and you still earn interest on the money you save. If your income varies and some months you need financial backup, using an easy access savings account is convenient. The interest rates tend to be quite low, but as you build your financial resilience you can start to look at the higher-interest rate savings accounts available.
Like the name suggests, this savings account requires you to deposit a specified amount each month. If you have a large disposable income, this should be fairly straightforward but if you have fluctuating outgoings or your income isn’t steady, it may be difficult to stay within the terms of this account. You can still access the money in the account at any time, but the bank may limit the number of withdrawals you can make so you’ll need to have your finances in order and a relatively good control over your money in order to make this work well for you.
ISAs, or Individual Savings Accounts, are another way to save and are particularly beneficial for people with large savings as the interest is tax-free. This is only relevant if you earn more than £1000 in interest each year, so for most people it’s of little concern, but it’s an incentive for those on higher salaries or with particularly large cash assets.
A method, which was once the norm, but now seems outdated: saving cash into a piggy bank. As cash is less common, and people are receiving their wages directly into a bank account rather than cash-in-hand, piggy banks aren’t the most convenient way to save anymore. However, if you do struggle to separate the money in your accounts into savings and spending categories, then withdrawing the cash and physically saving the money could be a suitable solution. You won’t earn interest on your savings, but the money remains accessible, and you can see the funds build which can encourage you to save more.
Premium bonds are an alternative way to save. Instead of earning interest on your savings, you can buy bonds at £1 each (minimum initial buy is £25) and then each month the bonds are entered into a prize draw where you can win between £25 and £1million. The more money you save into premium bonds, the more chance you have of winning. The odds are currently estimated at 1 in 34,500 so there’s certainly no guarantee you will win any cash, but even if you win just £25 over a year, it’s probably more than you’d earn in interest with regular savings accounts at the moment. You can withdraw the money you have saved in bonds at any time, and your money is protected in line with the financial services compensation scheme.
Having savings helps build your financial resilience to protect yourself against cashflow shortfall, income shocks and other temporary or long term financial issues. You may find you worry about your money less, find it easier to budget and manage your payments, and overall experience a less stressful life day to day.
Another reason it’s so important to save is so that you can reduce your dependency on credit, especially if you have a low credit score or poor credit history. Instead of having to get a small loan with bad credit – which can be tricky given the limited choice available – you can use your savings to cover emergency expenses or unexpectedly high bills. You may also find it easier to manage your money as you will have less of your disposable income committed to loan and credit repayments.
Check out our other great content in our Info Hub, with articles about the different types of credit products, money management tips and help with saving money!