Saving money might seem like a distant goal with the rising costs of bills and essential expenses like food. However, financial experts stress the importance of setting aside funds for emergencies. The current interest rates on some savings accounts are the highest they've been in 15 years, making it worthwhile to carefully consider where to invest your money.
Why is now a favorable time to save? The Bank of England's benchmark interest rate has steadily increased for nearly two years, possibly reaching its peak. Meanwhile, the cost of living continues to rise above the target rate. These circumstances have two implications for your savings.
Firstly, the returns or interest offered on savings accounts have improved, even though borrowing has become more expensive. For instance, you may come across accounts that offer a 5% annual interest rate, meaning that £1,000 saved for a year would yield £50 in interest. Over time, this interest compounds, resulting in a growing lump sum.
Secondly, the purchasing power of your saved money is diminishing due to the increasing prices. According to Bank of England data, there is approximately £268 billion in non-interest paying accounts, primarily current accounts. Financial experts suggest finding a suitable savings account to take advantage of these higher interest rates and counteract the negative impact of rising prices. While investing your money is an option, it comes with greater risks.
But why save when budgeting is already challenging? Many individuals struggle to make ends meet, especially with soaring energy and food bills. Finding extra funds to save can be daunting. If you have outstanding debts that need to be managed, addressing those should be a priority before considering saving.
Nevertheless, setting aside money regularly in an emergency savings fund can help you avoid falling into serious debt. It's better to have money available for unexpected expenses like car repairs or replacing your children's school shoes than having to borrow it. Additionally, saving throughout the year for occasions like Christmas or vacations can be beneficial.
So, how do you start saving money? The general advice is to assess your finances, establish a savings goal, and begin by saving a small, manageable amount consistently. Organizations like the Building Societies Association offer guidance on getting started during UK Savings Week.
Choosing the right account type can be complex, as various savings products cater to different needs. Easy-access accounts, although offering lower interest rates, allow you to withdraw your money at any time. Fixed-term accounts or bonds offer higher interest rates but lock your money for a specific period.
Regular saver accounts, often linked to current accounts, may restrict access to your funds for a while, and it may take time to accumulate significant interest if you start with a small deposit. Notice accounts require advance notice for withdrawals, while you can forgo interest in favor of entering a prize draw, as seen with Premium Bonds.
If you lack access to a bank account, credit unions provide savings opportunities, and government incentives can encourage long-term savings, especially for children. With various options available, it's essential to shop around not only for the best interest rate but also to find the account that suits your specific needs. To avoid choice paralysis, you might want to set a deadline for your decision-making process.
It's worth noting that banks and savings providers don't necessarily keep you on the best deal. They often advertise attractive headline interest rates that might only be available for a short period. Loyalty may not yield the highest returns, so it's advisable to review old accounts established years ago.
Regarding tax and benefits implications, every basic and higher-rate taxpayer has a personal savings allowance, exempting the first £1,000 of interest from taxation (or the first £500 for higher-rate taxpayers). Individual Savings Accounts (ISAs) allow tax-free savings of up to £20,000 per year.
Large savings can affect eligibility for universal credit claims. In case a bank or building society faces insolvency, the first £85,000 per person, per institution is safeguarded and would be refunded.
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