The interest rate on savings accounts in the UK has hit a record low. I have two of them, and the maximum interest I get is 2.5%. That’s on my monthly savings account that only allows me to deposit £250 a month. At the end of the year I’ll have £3,000 in this savings account, meaning I’ll get £75 interest after a year of saving money. With interest rates on savings accounts so low, it’s no wonder people are looking for other ways to save their money. But all of this can get quite confusing. So here’s my stress free guide to savings accounts.
Three Common Savings Accounts
There are three types of savings accounts that I know of, and these are the ones available to me through my bank. One thing to remember is that your bank might not give you the best offer. It’s always worth checking out the independent retailers as well as the other high street banks to get the most out of your money.
As soon as I started saving money, I was told not to keep it in a savings account. It is seen as the laziest thing you can do. Watching your money sit there, not accumulating any profit. Investing has become increasingly popular over recent years. But this post isn’t about investing, this post is about savings accounts. These are the three most common types of savings accounts available to you:
- Savings Bonds
- Savings Account
Within these savings account categories, there are loads of sub categories. You can get help-to-buy ISA’s for example. I’m going to be giving you the most simple breakdown of the three. Just clear, cut throat information, to really help you make your mind up. If you want more information on any of these savings accounts, I suggest checking out this post from Money Saving Expert.
Shamefully, this is the current method I use to save my money. If you want to see my current savings situation, just click here and read this post. I know that I could be earning a lot more interest if I chose to put my money in an ISA or a savings bond, but I don’t want to lose access to my money for a long period of time. I’m going to take a stab in the dark and guess that this is the reason most people aren’t rich. The key reason that people use savings accounts is because you have constant, flexible access to your money. However, they often have low interest rates.
My bank offers loads of different savings accounts. You can get an easy saver, a standard saver, and a monthly saver. If I’m honest, I can’t see the difference in an easy saver and a standard saver. All I can tell you is that after a year, the easy saver will turn into a standard saver anyway. They have the same (low) interest rate, and are both flexible in terms of when you can deposit and when you can withdraw your money.
The third savings account I listed was the monthly saver, and this is where it gets a bit different. The monthly saver has a higher interest rate, but limits the amount of money you can deposit per month. It still allows you to withdraw your money whenever you want though.
- Your bank will offer a variety of savings accounts, with varying features such as interest rates and deposit limits.
- Interest rates are at a record low with this type of saving.
- You could have to pay interest tax on any interest.
- You will have 24/7 access to your money.
- Occasionally, you might have a monthly deposit requirement or limit.
Essentially, ISA stands for Individual Savings Accounts which is why you’ll find some similarities from above. ISAs are similar to savings accounts in that you can open them through your bank (or an independent advisor). The great thing about them, is that they are completely tax free. With a standard savings accounts, you’ll likely have to pay income tax on any interest that you earn.
Other than the fact it is tax free, an ISA is very similar to a traditional savings account. The only difference is that there is a fixed limit to how much you can pay in. Obviously, the government don’t want you earning too much interest without paying taxes.
The fixed limit is decided by the government, and changes every tax year. For the current tax year, the limit is £20,000. But on the first of April, it will change to suit the economic environment at the time. This is why you see a push in ISA promotion around January-April. It is trying to encourage people to use up their ISA allowance before the new tax year, when the allowance gets refreshed.
There are loads of different types of ISAs, which I will be going into in another post, but for now you can check out Fidelity ISA for more information and tips.
- Independent Savings Accounts similar to standard savings accounts with added benefits.
- Any interest earned is completely tax free.
- There is a limit to how much you can deposit.
- You have a yearly ISA allowance, which is refreshed on April 1st (start of new tax year).
- There are different types of ISAs which can offer you a better Return on Investment.
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A savings bond is something that you are tied into for a period of time. This can be anything from a few months to five years or more. The word bond means you are tied into something, and that could mean huge fees or loss of interest if you need to access your savings. Long term contracts shouldn’t put you off though. They often have bigger rewards, which becomes evident as I divulge more about a savings bond.
A savings bond could have a variable rate of interest, or a fixed rate. It depends on the provider. What you are doing is basically giving your money to someone else to invest, and then asking for it back at a certain date. This means that you could find yourself earning a higher or lower interest rate than you were offered.
Because you are committing your savings for a long period of time, the interest rates are generally much higher than those of traditional savings accounts. Like ISAs, you can choose between a savings bond or an investment bond. Each have varying levels of risk, so be sure to do your research before taking the plunge.
- Interest is higher with a savings bond, and can be variable depended on your provider.
- There is no limit to how much you can deposit.
- You are tied into a fixed term contract.
- There are two types of bonds (savings and investment) with different levels of risk.
- It can be expensive to withdraw your money before the end of the fixed term contract.
A Stress Free Guide to Savings Accounts: A Summary
There you have it. A dumb girls guide to savings accounts. I’m currently working on posts that go into more detail on each of these options, but this is everything you need to know to get a basic understanding. If you’ve got any questions, email me at email@example.com or you can leave a comment down below.