How to start saving•
Getting your head around the world of money can be tough. But, once you’ve got the fundamentals down, everything gets that bit easier.
Why savings matter
Saving money can help make future dreams a reality, whether that be paying for a wedding, house deposit, holiday or something smaller, like a family trip to a theme park. It can also provide a bit of security for when those unexpected expenses pop out of nowhere.
The sooner you start, the more you stand to benefit. Not only do you get more time to grow your stash, but you’ll earn more in interest, too. Without further ado, let’s get into the nitty gritty.
Setting money aside regularly is just one way of making your savings grow. The other is interest, which is paid to you by the bank you save with. The interest you earn is a percentage of how much you’ve got saved. Let’s say you saved £1,000 in an account that paid 10% interest annually. After a year, you’d earn £100 in interest, leaving you with £1,100 overall. (We’ve picked this as an example rate for the sake of simpler maths – you won’t find an account that pays that much!)
AER, gross and compound interest
When looking at savings accounts, you’ll see ‘AER’ and ‘gross’ interest rates. They sound confusing, but they’re there to help you compare the rates of different accounts.
AER stands for annual equivalent rate. This is the rate of interest you’d earn over the course of a year, factoring in what’s known as ‘compound interest’. Another confusing term. But compound interest is a good thing for savers. It refers to earning interest on the interest you’ve already earned. Even more confusing? Let’s continue with the example above. If you decided to leave your £1,100 in the same account for another year at 10%, this time you’d earn £110. That extra £10 is compound interest in action.
Gross refers to the interest rate that’s applied to your savings before any tax or deductions are taken off. It doesn’t factor in compound interest which is why this number will usually look a little lower than the AER figure.
Different types of savings account
Saving doesn’t just mean leaving money in your current account at the end of each month. There are different, specially designed accounts to help you grow your money in ways that suit your needs.
Easy / instant access
These are savings accounts which’ll pay a higher interest rate than your current account. They’re simple to get started with – you may only need £1 to open an account – and you can withdraw your money anytime without paying a penalty. That makes them great if you know you might need to access your savings at the drop of a hat. They tend to pay a lower interest rate than notice or fixed term accounts, but the rate is variable, which means it can change over time.
Fixed term savings
These accounts pay a higher rate of interest than easy access, but you’ll need to agree to lock your money in for a fixed period – usually 1 – 5 years. You then can’t withdraw until the end of your term. For that period, your interest rate will stay the same. It’s really important you only save money you know you won’t need until the end of the term. Some providers will let you access your money early, but only if you pay a penalty charge. With others that won’t be an option at all. Also, these accounts tend to have a higher minimum balance to get started – sometimes as much as £1,000.
These accounts come with an agreed notice period before you can withdraw, typically between 30 – 90 days. If you have a 30-day notice account, you’ll give ‘notice’ before you want to withdraw, and your money will be available in 30 days. Notice accounts can act as a halfway house between easy access and fixed term: You can earn a higher rate than easy access. And, while not getting instant withdrawal access, there’s a bit more flexibility than fixed term. Minimum balances can vary so always look into this before opening a notice account.
Regular savings accounts
These are accounts for people looking to save regularly. You’ll agree to pay in a certain amount each month over a set period, usually a maximum of 12 months. In return, you should be offered a higher rate than you’d get on a normal easy access account. With some providers, you’ll need to open a current account before you can access their regular savings account. Also, the amount you need to save each month can vary, and there can be strict terms on the total amount you can save and how often you’re able to withdraw. That’s why it’s super important to check all those details before opening a regular saver.
ISAs are a way to save without having to pay tax on the interest you earn. You can save up to £20,000 per tax year in ISAs and there are lots of different types, including easy access and fixed term. Are they worth it? That depends. The interest rates tend to be lower than non-ISA equivalent accounts. And, through the ‘personal savings allowance’, you could earn up to £1,000 in interest a year tax-free anyway. To learn more about whether an ISA might be right for you, check out this guide.
When picking a savings account, you should check that it comes with Financial Services Compensation Scheme (FSCS) protection. Having this means that if your savings provider goes bust, your money is protected up to £85,000. Find out more here.
Here are a few hints and tips to help set you up for success on your savings journey.
Set savings goals: Having a concrete goal you’re savings towards – whether that’s a total you’d like to reach or something you’re saving up for – is a great way to stay motivated and it doesn’t have to be a huge amount. You could also create a budget, so you can work out how much you could save each month.
Automate your savings: If you’re not used to setting money aside, you could try automating your savings top-ups with standing orders or other tools. Choose how much and how often you want to pay in, and your savings will quietly grow in the background. If you set this up on or close to payday, before other outgoings, it can make saving easier. This is sometimes known as the ‘pay yourself first’ technique. Find out more here.
Remove temptation: Worried you’ll be tempted to dip into your savings early? Notice or fixed term accounts can help put a bit of distance between you and your cash. But be sure you’re only using them for savings you won’t need in an emergency.
Round ups: Some current accounts or personal finance apps offer something known as ‘round ups’. Each time you spend the transaction amount is rounded up to the nearest pound, with the added amount going into a savings account. If you bought something worth £1.20, you’d be ‘charged’ £2.00, with the extra £0.80 going into your savings account. Over time these little payments can build up.
Savings challenges: If you need a little extra motivation to help you save, you could try taking on a savings challenge. For a bit of inspiration, here’s a list of some you could do.
An intro to investing and pensions
Saving isn’t the only way to grow your money – you also have the option to invest. The upside of investing is you could earn a higher return and reach your goals quicker. The downside: there’s a lot more risk involved – you could end up with less money than you started with, or even lose it all. To get more of an intro into investing, check out this blog.
One type of investment a lot of people do end up with is a pension, which is a tax-efficient way of saving for retirement. Whether you’re employed or self-employed, pension contributions are, for the most part, tax-free. This is one of the reasons saving into a pension can be more effective than saving for retirement in other ways.
If you’re employed, you get the added bonus that the company you work for can contribute to your pension too – that’s extra money on top of your salary that you’ll be able to tap into later in life. Whatever you pay into your pension will be invested to help it grow over time alongside your contributions. Once you retire, or turn 55, can you access the money in your pension.
If you’re employed, you can find out more about pensions here. If you‘re self-employed, head here. Those who are over 50 can find free impartial advice on how to access their pension from Pension Wise here and can also do a Money Midlife MOT. Also, no matter how you’re employed, you could benefit from the state pension when you retire.
Interested in finding out more? Sign up for one of The Money Charity's free and interactive virtual workshops by emailing email@example.com for a deeper dive on managing your personal finance.
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