Savings can be vital to improve your financial wellbeing as they help you manage cashflow, meet unexpected payments and give you the confidence that you are in control of your money. But starting your savings journey can feel daunting because choosing a suitable savings account is not so straightforward.
Types of Bank Account
There are two main types of bank account: current accounts and savings accounts. A current account is usually your main account for your general income and expenditure. It usually comes with a debit card so you can make cashless purchases, though you can also withdraw cash at an ATM. A savings account comes in many forms, but this is generally where you deposit any funds you want to save, either for short term or long term use. Both current accounts and savings accounts can earn interest, and with over 300 banks and building societies in the UK, there are plenty of options to choose from.
Types of Savings Accounts
Easy Access Savings Account
An easy access savings account allows you to easily and quickly access the funds you have saved. These can be useful if your income fluctuates or if you’re still building your savings up and may need to access the money on short notice. Easy access savings accounts do pay interest on the amount you save, but often the interest rate is lower than with other savings accounts.
Regular Saver Savings Account
With regular saver savings accounts you generally need to pay in a specified amount each month, but the interest rates are usually a little higher than easy access savings accounts. Earning more interest is an advantage, but if you don’t have regular disposable income you can afford to save, it can make it tricky to use one of these accounts. The funds are still accessible, but there may be restrictions on the number of withdrawals you can make each month.
Fixed Rate Savings Account
Fixed rate savings accounts typically pay higher interest rates than other options, but this is because your savings are locked away for an agreed term (usually between 1 and 5 years). You can’t withdraw from the account without penalties like loss of interest. This is because when you put your savings into a fixed rate savings account, you lend the money to the bank and create a bond. They want to know that you are not going to withdraw the funds before the agreed term has ended (and before they’ve had the chance to recover the money they lent).
Individual Savings Account (ISA)
An individual savings account, more commonly referred to as an ISA, pays tax-free interest on your savings. The tax-free part is really only relevant if you earn more than around £1000 in interest each year (which is quite hard to do with the current interest rates). The government sets the limit to how much you can save into an ISA each year, currently (in 2021) it’s £20,000. Another version of an ISA, the Lifetime ISA, is a particularly good way to save for your first house or for retirement, as the government pays a bonus of up to 25% (capped at £1000) for the money you save, on top of the interest paid by the bank.
Which savings account should I choose?
Choosing a savings account should be fairly straightforward, but with so many variables it can feel overwhelming. Depending on your current and future financial circumstances, you may find some savings accounts are unsuitable. For example, if you know you’re going on maternity leave soon, and your income will be reducing, then a regular saver savings account might not be the best option as you may struggle to maintain the regular payments on a reduced income.
Savings accounts will also differ between banks, so even if you decide that a fixed rate savings account is suitable, you then have to choose a bank which provides the best fixed rate savings account for you. You can usually use online comparison websites to make this process easier, but there’s also nothing wrong with contacting the bank directly if there’s anything you’re unsure about. You should never take out any financial product you don’t fully understand.
How savings can help with borrowing
You can find where to borrow money online, so it’s a very quick and easy process. But borrowing shouldn’t really be your first port of call, and having savings means you don’t need to depend on credit to manage your finances. Your savings might also reduce the amount you need to borrow or help you with the deposits you need in order to access credit (like with mortgages and car finance). So even though loans and credit cards can help you with your finances, having some savings can ease the financial stresses that might cause you to borrow in the first place.
