So you’ve made a budget and now have the capacity to put some money away each month, or perhaps you’ve come into some money unexpectedly. The question is: what do you do with it?
You sure as heck don’t want to spend it all or inflate your lifestyle. All of you responsible readers know that that would a silly idea! One option would be to try and generate some passive income from investing – similar to what I wrote about a couple of weeks ago. For some however, investing is just not an appropriate choice; probably for one of the following reasons:
- You deem it too risky – you don’t have the time or confidence to learn the stock market and would worry too much
- You might need easy access to the money – stock market is not the best place to invest for an unknown duration
- You can’t risk losing any of it – again investing is a lot riskier than stashing it in a bank account
- You already have money in the stock market and want to diversify your portfolio
Whether it be one of the above reasons, or something else – we should all know a little bit about maximising our savings with the bank.
Here’s a quick guide on making the most of what money you do have to save.
Where to start
You’re definitely going to be tempted by the most high interest savings accounts, as this is clearly the best way to ensure your savings work as hard as they possibly can. But the highest rates of interest aren’t always available to you, as it will depend on your individual circumstances, so it’s important to ask yourself the following questions:
- How much do I have to save?
- Can I only put a certain amount away each month?
- Can I afford to lock away a lump sum for a defined period of time?
- Do I need access to my savings?
- Should I be paying tax?
Let’s start with the latter:
No one wants to pay tax if they don’t have to and creating a Cash ISA the ideal place to start your savings future. With a standard savings account, you’ll have to pay a certain percentage of the interest you make to the Government (for basic rate tax payers this is set at 20%). Saving through a Cash ISA removes this requirement and lets you save a specific amount each tax year (your ISA allowance) without paying any tax on the interest you make.
For the current tax year, the ISA allowance is set at £5,640 for a Cash ISA, set to increase to £5,760 on 6th April 2013. Some ISAs are definitely better than others – those that are managed online typically have higher interest rates. Some ISAs have a clause that will only pay out the full interest rate if you don’t make any withdrawals throughout the tax year. Consider your circumstances and find an account that meets your needs.
Locking away a lump sum
One of the best ways to secure a high interest rate for your savings is by opting for a fixed rate savings account, also called fixed rate bonds. This means that you lock away your savings for a specific period of time in exchange for the best rates of interest. Once you make your first deposit you’re unable to add to it or withdraw from it until the term is up (you may suffer rate penalties if you do so). If you have a lump sum and you don’t need access to it for one or two years, a fixed rate savings account is one of the best ways to really make your savings work for you. Consider that interest rates in the UK are linked to the Bank of England base rate and can go up as well as down. Locking away your money can sometimes be a disadvantage.
Easy access savings account
With this type of savings account you can deposit funds and access them as and when you need them. You may not get the best rate of interest, but it’s a good place to start to get into the habit of saving. Once you’ve done this, you can look at your other options to increase your savings pot. If you are not using your ISA allowance, you are probably better off putting the money in their – even if it is for the short term.
Starting to save is only half the battle, it’s vital that you make the most of what you have.
I strongly believe and advocate that you should create yourself a diversified portfolio. I would consider investing all your money in the stock market as foolish, similar to how I would consider leaving all your money sitting in the bank stupid (allowing the banks to make more money for themselves). No matter what type of saver you are or how disciplined you are at putting money away; we should all have easy access to some cash. Furthermore, anyone in the UK who doesn’t take advantage of their ISA and saves money elsewhere – needs their head’s examined! Why would you voluntarily pay tax?!?!
Need more convincing? Here are 5 Reasons Why Savings are Important.