How to find the best savings account for your money
LOOKING to boost your rainy day fund? We take a look at the best paying savings accounts on the market.
Savers can still put away a tidy sum, despite the Bank of England holding interest rates at a record low of 0.1%.
From fixing leaking pipes to purchasing a new car or luxury holiday, a savings account can have plenty of uses.
It can provide a pot of money to cover emergencies or help you reach savings goals such as paying for a new car or holiday.
Building a savings habit can also help you budget so you can stretch your pay packet beyond just your bills.
What is a savings account?
A savings account is a product offered by banks or building societies that pays a fixed or variable rate of interest over a set period.
It is separate to your main current account so money is put aside and can grow rather than being used to pay bills or for a round of drinks at the pub.
Savings accounts are offered by all of the main banks and building societies as well as online and challenger brands.
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How does a saving account work?
Savings accounts work in a variety of ways.
Some require a minimum monthly deposit or you may just need a certain amount to open the account and then can put in as much as you like.
A savings account will have a fixed or variable rate of interest.
A fixed rate pays the same amount, usually each year, over a set period such as one, two or five years.
Providers may also offer variable accounts where the rate on offer can change at any time.
Regulated firms, including savings providers have to follow rules on making product terms clear and there is FSCS protection which covers up to £85,000 of your money if a bank or building society goes bust.
Watch out for online scams as some fraudsters may pay for ads that appear high up in search results offering savings accounts but often they are not regulated and there is no FSCS protection.
Are savings accounts worth it?
The interest rate offered on savings accounts is linked to several factors.
This includes the Bank of England base rate, which is currently at historic lows of 0.1%.
The base rate is one of the main indicators for pricing products, so if it is low there is less incentive for banks to offer a decent rate.
Pricing may also depend on how much a bank or building society wants to attract new deposits.
This may make putting money into a savings account seem like a waste of time.
But saving something is better than nothing.
You can earn more interest than just leaving money in your current account.
Additionally, a savings product makes your pay packet go further by boosting your earnings and helping you reach personal goals.
Some savings accounts may also help you beat inflation, which is the measure of the cost of living.
If the inflation rate is higher than interest earned on money in your bank account then its value is being reduced as you are effectively spending more on bills than what you are earning.
Putting money into a savings account can help beat inflation if you can find a high enough rate. Or it can just be a useful way to stop you spending all your spare cash.
How much should I have in savings?
The amount you have in savings depends on your goals.
Experts recommend a rainy-day fund of at least three months of expenses to cover emergencies such as if you lose income or have to fix a burst pipe.
Work out your monthly expenses such as mortgage or rent costs and how much you spend on essentials such as food and electricity.
If you spend £3,000 a month on these bills you would need £9,000 in savings.
Setting a savings goal can help you decide how much you need to put away.
For example, if you are saving for a car, work out when you want it, how much you need, and how long it would take to get the required amount based on your income.
You can then decide how much interest you need to earn and the type of savings product you should put your money into.
How much interest will I get on £1,000 a year in a savings account?
The amount of interest you can earn in a savings account depends on the type of product.
Easy access accounts tend to have lower rates.
The best savings rates are usually in fixed deals, but you have to lock up your money for longer and there may be penalties for withdrawals.
If you found a rate to match inflation, currently 0.4% in March, a basic rate taxpayer would earn £3 a year, dropping to £2 for higher earners.
Savers also benefit from the Personal Savings Allowance (PSA).
This lets basic rate taxpayers earn £1,000 in interest a year tax-free from their savings.
Higher-rate taxpayers get a £500 allowance.
How to find the best joint account for savings?
It may be worth opening a savings account in joint names with someone if you have shared savings goals.
This could be an account you share with your spouse to save for a holiday but it doesn’t have to be a relative.
It could be a boyfriend, girlfriend or flatmate where you both transfer money for rent or to buy a property together.
Most providers will let you open any savings account jointly.
They will need to see ID from both account holders.
This has benefits as it boosts the amount you can save, and your personal savings allowance (PSA) is shared with someone else so that gives you more money you can put elsewhere within the allowance.
There are risks though, as you need to be clear about how much each person is contributing and consider what would happen to the money if you change your goal if you or the other person needs to access the money or you get divorced.
Where can I put my money instead of a savings account?
A savings account is just one option for growing your money.
You can also earn interest tax-free with an Isa.
Everyone has a £20,000 annual allowance that can be spread across a Cash Isa, Stocks and Shares Isa, Lifetime Isa and Innovative Finance Isa.
It may also be worth topping up your pension or if you have a large sum you could take out a buy-to-let mortgage and earn rental income by becoming a landlord.