Saving can often feel like a real struggle - and with rates not as high as they could be you need your money in the right place - read our 8 essential lessons every saver should learn.
Whether you’ve inherited some money, just started working or are a veteran saver, there are a number of key lessons to learn about the world of savings - after all you can’t rely on the banks to give you a good return, it’s down to you to stay on your toes and make your money work hard for you.
1. Know when to save
Most people like the idea of having money in a savings account, after all it feels good to save, but often there are better uses for your money.
So you need to ask yourself: is saving really worth my while?
This question is not an encouragement to go out and spend all your hard earned cash, it’s more taking the time to check if you have any other financial priorities that need to be dealt with before saving.
If you have any outstanding debts then chances are you can make better use of your money by clearing these rather than starting to save.
Banks will almost always charge you more for borrowing than you can earn on savings so it makes sense.
Even the most attractive of loans at present charges interest at a rate over 7% - you would be hard pushed to find a similar rate on a savings account.
Equally if you have an expensive credit card then paying off some of the balance is likely to save you more in interest than you could generate from savings. To double check this, simply compare the rate of interest you are charged by your credit card to the interest you're earning on your savings.
Clearing this form of debt will also provide you with emergency credit should you need it at a later date; a reason that many people with debt have money sat in a savings account.
If you do consider overpaying to clear debt then you should check if there are any limitations on how much extra you can pay, this is especially important if you are paying off a personal loan or mortgage rather than a credit card.
So while building savings is a good idea, it’s wise to check whether this really is the best use of your money
2. Know what you are saving for
Once you have learnt when to save, it’s important to establish exactly what you’re saving for, as it can often influence the best way to do it.
If you are simply saving for a rainy day or have a lump sum that you’re confident you won’t need to touch for a number of years, then a long-term saving account such as a fixed term bond is worth considering as you’re likely to get a better, guaranteed return. Meanwhile if you’re likely to need access to some, or all of your savings in the near future then an account that offers instant access – or notice if you’re willing to wait to get the cash – is likely to be the best bet.
Equally if you are lucky enough to have a lump sum to invest then you will need to look at different options than someone wanting to save £50 every month.
If you are unsure, then there is no reason you can’t split your savings, if you want to take advantage of better rates but also want some accessible then why not divide them into long and short term funds.
For more information on long and short term savings accounts you can read our Should I Get a Long or Short Term Fixed Rate on my Savings? article.
3. Know what you're earning on existing savings
Thousands of people have money in old accounts, no longer available to new customers, which pay interest at a rate of 0.1% or less!
If you have money in saving accounts that you haven’t checked in a while then there is a danger that the rate will have dropped considerably. In fact, if the rate of interest you’re earning is lower than inflation it’s possible that your savings are actually losing you money!
So knowing exactly what rate you are earning on each of your savings accounts will mean that you can see if you can beat it elsewhere. To find your rate you can either check your bank statement, where it should be stated in the small print, or contact your bank directly to check the rate.
Then if there is no penalty for withdrawing your funds and you can find a better rate elsewhere then you are free to move your money.
4. Know what interest you’re actually getting
The majority of advertised rates you see online or in the bank window are not the actual rates you will earn in interest. This is because banks and building societies usually display their gross rates rather than the net level that will be credited to your account.
The difference between gross and net rates is due to the tax you have to pay the government on your savings. Tax is deducted at the same rate as your income tax to provide your net savings rate - if you are exempt from tax then you will earn the gross rate.
The most notable exception to this is the Cash ISA. Cash ISA’s form part of your tax free saving allowance, currently up to £5,640 cash, and unlike other savings accounts you don’t pay any tax on your interest. (This increased from £5,340 in the 2011/12 tax year.)
So with a Cash ISA the rate you see is the rate you get. So being tax savvy and comparing you net rate to ISA rates is a must for all savers.
5. Understand your account’s Ts & Cs
Often, the accounts that offer the best interest rates impose restrictions on access to your money and other terms that you need to adhere to in order to get the advertised rate.
For example, some might penalise you for withdrawing money before a certain date, while others require you to keep a certain amount in the account, or pay in a certain amount each month or your interest rate will drop through the floor.
Checking the terms and conditions of a savings account will help you to play by the rules so you are not stung by unexpected charges or withdrawal limitations and make the most of the interest on offer.
6. Understand bonuses aren't the enemy
Many savings accounts offer headline rates to tempt you and your money in. Unfortunately a lot of these more attractive rates are boosted by a short-term bonus and don’t last very long, so if you’re not careful you could soon find yourself earning a pittance on your funds.
However, if you are willing to be pro-active and move your money around then there is no reason why you can’t take advantage of these bonus rates and jump ship as soon as they come to an end. Doing this will require some discipline and, of course, you will need to keep track of when each bonus period is set to finish, so that you have time to search for an alternative account that offers the best possible rate of interest when it’s time to move on.
7. Saving isn’t your only option
If after searching the market you are left feeling disenchanted by poor savings rates, then there are some slightly more adventurous options you could consider.
Investing offers the potential of a much greater return on your money but comes with a much greater associated risk. Essentially you are gambling on the performance of your investments to give you a better return.
Some types of investment will put your capital at risk so it is important to know what you are signing up for. If you are looking to save for the long term and don’t mind the risk factor looking into share dealing may be a more exciting and attractive option.
If the stock market doesn’t take your fancy and you are a homeowner why not consider investing in your property? There are a number of ways you can increase the value of your home, or make savings in other areas, and remember that for as long as you live in the property you can enjoy any improvements you make.
Finally, if you like the idea of investing in something slightly different then alternate investments such as gold & wine might be worth investigating. The price of gold has shot up in recent years and you can choose to invest as part of a fund or purchase bullion directly in you would prefer physical evidence of your investment.
Wine as an investment is based upon an ever diminishing supply, essentially as fine wine is drunk the remaining bottles increase in value. However in order to get the greatest returns many investors purchase wine before it has fully matured, in the hope that it proves to be a vintage and worth more when mature, and as a result can be quite a risky investment.
If you are considering alternate investments such as gold and wine then you should seek expert advice on where to invest and the associated risk involved. Often there is no upfront fee for investment advice but they may charge a commission on any money you make.
8. Review Regularly
The final and perhaps most important lesson that every saver should learn is the importance of reviewing your accounts on a regular basis.
The chances are that this will be a relatively quick check, especially if you’ve opted for a fixed term bond or regular savings account, but it will ensure that you’re not caught out by any sneaky drops in interest rates.
All you would need to do it check what interest rate you currently have on each account and then compare it to the best on the market. That way you know you won’t miss out when better rates become available!
