This article is designed to be a brief overview to help you get better at saving money. You may wish to speak to a financial adviser for more guidance and information.
We all save money for different reasons. Sometimes it’s for a major purchase, like a new kitchen or a car. Or it might be for a holiday. Or perhaps to pay for our children to go to university. Alternatively, we might just be putting something aside for a rainy day in case we need it.
But no matter how good we are at saving, we may be able to get even better. In this blog we consider how to save effectively, even on a budget. We also look into whether it’s worth getting a savings account, and what interest rates are.
How to save money effectively
While many of us save regularly, we may be able to save more effectively and make our money work harder for us.
- Shop around for the most suitable account – it’s tempting to open a savings account with your existing bank or building society. However, you may miss out on a better deal elsewhere. If you were buying a new washing machine, would you buy the first one you saw? Or would you decide which machine you want, then shop around for the best price? Savings accounts work in a similar way. Do some research and you’ll probably find another provider offering a better rate of interest than your current one. So, as with everything else, it’s worth doing some research before you commit. Do ensure that you’ll get the service and access you want too. Maybe face to face service is important, or you may want to manage everything online? You might be able to commit to saving for two years, or you may want easy access.
- Look for new account offers – you may also find you can get a preferable rate of interest if you switch accounts to another bank or building society. Some may offer a higher interest rate for a set period, while others may offer a cash incentive to open an account. If you go for a deal like this though, be aware that the rate of interest is likely to drop at some point. So, make sure you know what it will be in the long term and that you aren’t tying yourself into an account that leaves you worse off over time.
- Consider opening an ISA – the main benefit of opening an ISA or a Junior ISA is that no matter how much interest you earn, you won’t have to pay any tax. For the latest details about ISAs, see the government website.
- Some products come with a government bonus – a Lifetime ISA could be worth considering if you’re saving for your first home or retirement. This is because a government top up for your savings may be available. The Lifetime ISA scheme may change in the future. For the latest details about Lifetime ISAs, see the government website.
- Consider investing – if you’re looking to save on a long-term basis, it may be worth considering investing in stocks and shares. You might decide to do this alongside savings in cash to cover your bases. Money invested in stock and shares has the potential to grow at a higher rate than savings held in cash over the long term. Just be aware that the value of your investments may fall as well as rise, so it’s important to be aware of the risks involved. A stocks and shares ISA could be worth considering. It’s always a good idea to speak to a financial adviser before investing.
- Think long term – if you’re saving cash, you may find that accounts that commit you to saving for a longer period offer a higher rate of interest. However, bear in mind that if your interest rate is fixed it won’t change when the bank or building society savings interest rates change. So, you could miss out if interest rates go up.
How to save money on a budget
You may think you don’t have enough money to put any aside, but even small amounts can add up over time and make a difference. To work out how much you might be able to save, go through the following steps:
- Work out a budget for your monthly expenses – include all your outgoings, from food to electricity and your gym membership. Multiply this by 12 to see how much you spend over the year.
- Add up your other annual expenses – think about how much you spend on things like holidays, car maintenance, and gifts for family and friends.
- Think about any savings you can make – if you really want to maximise your savings take a good look at what’s in your budget and think about where you can make your money go further. Have you shopped around for the best deal on your insurance? What about your energy provider? Do you need a subscription to Netflix and Disney+?
- Work out how much you have left – subtract your total annual outgoings, including your monthly bills and your annual/irregular expenses, from your annual take home income. Hopefully, over the year, your outgoings will be less than your income. If that’s the case, you’ll now know how much you can save each year. If it’s not lower, you’ll want to think about which of your outgoings you can reduce.
You may decide to save a regular amount each month. However, paying your annual and irregular expenses may make that difficult if finances are tight and you don’t have savings to act as a buffer. For example, if your MOT is due at the same time as the final payment on your summer holiday, you may not be able to save anything that month. But you may be able to put something extra aside the following month, when no additional expenses are due.
However you decide to save, having a plan and sticking to it will give you the best chance of meeting your financial goals.
Is it worth getting a savings account?
If you’re looking to save it’s certainly worth considering a savings account. This is because if you keep your savings in your current account, it’s likely that you won’t earn much or any interest on them. By contrast, a savings account is likely to pay you interest.
Having a savings account can also make it easier to keep track of how much you’ve saved, as your savings won’t be in the same account as your day-to-day spending. Also, you may be less likely to dip into your savings for unplanned spending if it’s in a different account, especially if it doesn’t feature a debit card.
What are interest rates on savings?
The interest rate you earn on your savings is the amount your bank or building society pays you for saving with them. For example, they may offer an annual fixed rate of 3.5% interest. This means if you saved £1,000 for a full calendar year, at the end of the year you’d earn £35 interest, if the interest is paid annually. Be aware that interest rates can be fixed for a period of time, or they can be variable, depending on the type of account you have.
Does it make sense to have multiple savings accounts?
Having multiple savings accounts can make sense, especially if you’re saving large amounts. This is because the Financial Services Compensation Scheme (FSCS) protects up to £120,000 per person, per banking group or building society. This means that if your bank were to fail, your savings are protected. If you have more than £120,000 saved with a certain bank though, anything above that amount won’t be protected. In this case you may want to consider saving with more than one banking group or building society. The only exception to this limit is savings held with National Savings and Investments (NS&I).
You may also want different levels of access to your savings. For example, you may find an account with a great rate of interest that’s fixed for 3 years. However, if this means you can’t access your funds for 3 years, you may decide to save with a combination of a 3-year fixed rate savings account and an instant access savings account.
Having multiple accounts can also help with goal tracking. Using the example above, you may decide to put money aside for a new car in a 3-year fixed rate account, while saving for your next holiday in an instant access saver.
Finally, having multiple accounts can help you make the most of rising interest rates. If you save all your money in a fixed rate account that commits you for a set period, you won’t be able to move your money to a different account if rates rise. However, if you have some of your savings in an accessible account, you can. In addition, if rates fall and you have a fixed rate savings account, then you’ll still receive the same rate of interest.
Overall, there are several options to explore when you’re thinking about how to maximise your savings. Taking the time to do some research will make sure you end up with the best option for you and get the most from your money.
