Starting out with saving: a glossary of terms
There are a million and one things demanding a chunk of your wages but one is particularly rewarding of your attention: savings.
Building up some savings can help you deal with debt, send your kids to university, put down a deposit for a house and do numerous other good things in life.
Here's what you need to know when looking for an account.
Savings and investments
Savings accounts are a safe way of storing your money, keeping it out of temptation's reach in your current account and also earning it some interest at the same time.
A savings account intends to hold your funds for a while but can be retrieved relatively easily.
There are no major gambles involved as you will get back the amount you originally deposited plus the interest it has made.
Investments, though they often look like savings accounts, are a riskier business but can bring far higher earnings than simply saving.
There are a few choices you will need to make when looking for a savings account:
- How long you want to stash your cash for.
- Whether you want a fixed rate or variable interest linked to the Bank of England Base Rate (BEBR).
The longer the commitment to a savings account, the higher the interest.
However, especially with a fixed rate, rates on other accounts could either jump up or dip down over the next few years so you will be taking a gamble to some extent.
Types of savings
There are various options when it comes to account types, all variations on the two factors above.
Instant or easy access
This means account holders can access their funds whenever they want and avoid withdrawal fees.
Anyone can get one of these accounts as they usually start with just a £1 deposit.
The interest is usually variable so it will jump up or down depending on BEBR.
With these accounts you must deposit a certain amount each month.
There is often not much flexibility with such accounts and they often carry high withdrawal fees.
There are also usually penalties for missing deposits, so account holders need to ensure salary can definitely cover it on a regular basis.
There are also other conditions, detailed here.
The account will carry a fixed notice period you will need to give before you can withdraw your money without being charged a penalty - often loss of interest but it can include a fee.
This could vary from one month to 120 days notice.
The interest on these accounts is usually variable.
Fixed rate accounts
Those confident that they will not need to dip into savings for at least the short term future, can benefit from fixed rate accounts.
This is where the gamble comes in as, by agreeing to a fixed rate, you may miss out if the variable rate skyrockets.
However, you could also gain a better rate, comparatively, if the variable rates plummet. Bear in mind there may be a minimum balance requirement.
One of the most popular ways to gain high interest on savings is an Individual Savings Account (ISA).
Amounts in these accounts won't be subject to income or capital gains tax.
For this reason, ISAs, along with fixed rate accounts, are one of the best ways to make savings beat inflation.
There are two types of ISA, cash options offer a way to save money securely in the short term and allow for fairly quick access to your money.
A stocks and shares or investment ISA is a good option if you can afford to hoard your money for longer.
As we said above, this is riskier as the investment could drop in value. But it also has the potential for greater gains if the investment grows significantly.
Instead of making a choice between the two types, you can choose to spread your money between the two accounts.
You can put half of the overall limit into a cash ISA and the remainder into stocks and shares or the whole allowance into investments.
Individual account rates
Within each of these savings account product categories, rates will vary.
So once you've decided the type of account or accounts you're going for, consumers will need to pick a provider, based to a large extent on the amount of interest they're offering.
To compare interest rates across accounts you will be looking at Annual Equivalent Rate 'AER'.
The higher the AER, the greater the return.
Another thing to look out for is how regularly the interest is paid.
If it is paid, say, every month, your savings will earn more than an account that pays you your interest every year, if the AER offered is exactly the same between the two accounts.
This is because the interest you receive each month then itself gains interest the following month.
Bear in mind the AER doesn't take into account tax so don't directly compare the AER of a tax free ISA with another type of savings account.
Bear in mind that often the best bonus rates will only apply to new customers.
The rate often then drops after a certain period of time, typically after six to eight months.
For this reason you need to keep an eye out for better rates and know when it's time to move on.
However, make sure you have satisfied any time agreement you have signed up for before you make the switch as if you move your money too prematurely you could be hit by a hefty penalty.
Before you sign up to a new account, it's also important to make sure your chosen provider is covered by The Financial Services Compensation Scheme (FSCS).
This protects deposits of up to £85,000 per individual, per authorised institution.
The FSA warns customers to be careful as banks can have different
brand names that each fall under the same authorisation which may mean
you are not protected by the FSCS for as much as you might think.
If you need further help with this, ask the bank in question or see the FSA table listing the main deposit takers here .
We also have a full guide to this protection here.
Before you sign up, make sure you have read and understood all the terms of your chosen account, such as any withdrawal fees and the amount of withdrawals allowed per year (if any) without a fee or loss of interest.
You will also need to decide how you want to manage your savings account.
Due to the reduced admin, online accounts generally offer better rates than in branch, post or phone savings accounts.
However, some people may prefer to deal with their bank on a face-to-face basis, or at least have that option. Be aware that whichever type you sign up for, you may be restricted to dealing with any issues by this method only.
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