A basic guide to savings accounts. For those who are new to personal finance, the staggering range of bank providers, current and savings accounts and investment options can be bewildering.
In a world revolving around money, understanding the basics is crucial to ensure that you’re managing your money as well as you can. You’ll often hear people go on about savings and how they’re important for your future. While that is certainly true, you may not have been told about the practical side of savings and this can be difficult to get your head around.
As such, below we delve into the basics of savings accounts and uncover why, when and how you should be using them.
What are savings accounts?
Savings accounts are slightly different from current accounts in that they don’t allow you to spend money directly from them. This means that the money you deposit is effectively stored away for a purpose other than spending.
Banks and building societies offer a variety of savings accounts to suit different needs. These range from regular and easy-access savings accounts to fixed-rate and individual savings accounts (ISAs). Differences between them are typically factors like withdrawal restrictions, interest rates and minimum deposit amounts. We bust some of this jargon below:
Withdrawals: this refers to you taking money out of the savings account. Some accounts will allow you to withdraw more times per year than others; some allow unlimited withdrawals. This factor is intrinsically linked to interest rates. Financial institutions need to know how long you will keep your money in the account to offer you a rate that satisfies their interests.
Interest Rate: this is the amount of money that you can earn by keeping your money in a savings account. It’s paid by the account provider and is usually displayed in a percentage (Annual Equivalent Rate – AER) – meaning that you can earn that percentage of the value of your savings per year. Interest rates can go up and down in line with the economy, although fixed-rate accounts won’t be able to change during the agreed period.
Minimum to Open: most savings accounts will require at least a certain initial deposit to allow you to open an account. This can range anywhere from £1 to a few thousand. This again depends on the type of account and interest rate and terms being offered.
Why and when should you use a savings account?
Savings accounts should be used to store money that you don’t plan on spending in the short term.
So, while a current account should hold money for your bills and everyday spending, a savings account should hold money that you’re putting away for the future. This could be an emergency fund that gives you a financial cushion, or savings towards a big purchase such as a holiday, car or home.
Using a savings account over a current account here is better because you can earn interest on the money you save and keep it separate from your daily funds so you don’t accidentally spend it. It’s also easier to keep track of savings goals if you can see the figure in a dedicated savings account.
The purpose of your savings should play a large part in determining which savings account you opt for. For example, if you’re putting money away for emergencies, then an easy-access account is probably best because you can get hold of cash quickly if needed.
If you’re saving for a car or home, choosing an account with a higher interest rate and tighter restrictions may be worthwhile because you’re unlikely to need to access the money suddenly or unexpectedly. You can benefit from the interest earned on those savings to take you closer to your target.
There is plenty more jargon to contend with. But now you understand the basics, you can research to your heart’s content and find the perfect account for you. Best of luck!
Hope you’ve found our article, A basic guide to savings accounts useful.
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