What do we mean by saving?
Saving means setting aside small sums of money either on a regular basis or every now and then.
Think for a moment. What have you saved up for in the past? Are you saving up for anything now? Why do you think people save?
People save for all sorts of reasons, here are some examples:
“Hi, I’m Ed, 16. I want to be able to drive as soon as I turn 17 in 9 months’ time. I have a part-time job and have previously spent most of my earnings on music.”
“Hi, I’m Naomi, 18. I inherited £2,000 from my Nan. My Nan wanted me to have money to help me get started in a career when I leave university in three years’ time.”
“Hi, I’m Lou, 21. I’m working full-time, living in rented accommodation and I’m in the fortunate position of earning more than I need to get by. Yet, I never seem to have any money left at the end of the month and have no savings.”
How easy is it to save?
Saving comes more naturally to some people than to others. You’ll know from experience that some of your family and friends squirrel away their money ‘just in case’, whereas others spend it like there’s no tomorrow. The latter, like Lou, might need help in forming good savings habits. The good news is there are products out there that can help.
Where do people save?
Most people choose to save in a bank or building society accounts. Money is safer here than in your home (it’s can’t be stolen, for example, or lost). Most UK banks and building societies are covered by a compensation scheme. This means that if the one you are saving with does go out of business, your money is protected, up to a certain limit (£85,000 at present).
On top of this security, savings accounts usually pay interest. Interest is the money given to you by the bank or building society as a reward for saving with them. So, not only is your money in a safe place, but it is also earning its own money. The longer you leave your money in a savings account, the more interest you will earn. This is because not only does your money earn interest, but as soon as you receive interest into your account, the interest starts to earn interest too. This is known as compound interest.
What types of savings accounts are there?
Most banks and building societies offer three main types of savings accounts:
- Notice accounts – these pay interest, but you lose some of that interest if you withdraw money without giving the bank enough notice. The required notice could be anywhere between 30 and 90 days. A 30-day notice account might suit Ed, as he could notify the bank of his wish to withdraw the money he needs for his driving lessons 30 days before his 17th birthday.
- Fixed-term accounts – these pay interest, but you are not allowed to withdraw your money within the fixed-term which could be anywhere between 1 and 5 years. A 3 year fixed-term account might suit Naomi.
- Regular saver accounts – these often pay the lower interest. The customer usually sets up a regular payment to the regular saver account from the account their earnings are paid into. This type of account might suit someone like Lou who might not get around to actively transferring the money across herself each month. Lou can forget all about the payment as it will leave automatically, and over time, she will find that she has savings.
Is there an alternative to saving?
Not everyone wants to save. Nor is everyone fortunate enough to be in the position of being able to . Some people feel comfortable not saving, preferring to borrow money if they need anything they cannot afford in the future. For others, borrowing is their only option.
Borrowing can be expensive. Whereas banks and building societies reward their savers with interest, lenders charge interest on money borrowed. The amount of interest charge will vary depending on how likely the lender feels the borrower is to repay the loan on time. Those that the lender feels are most likely to get into financial difficulty are charged the highest rates.
Is there anything I should be looking out for?
The old adage ‘if it looks too good to be true, it probably is,’ applies to savings account. If, when comparing the interest rates payable from different banks and building societies, one seems to pay a much higher rate than the others, then you need to look into the account carefully. It could be that the account is offered by a non-UK bank. If this is the case, your money would not be covered by the UK compensation scheme, meaning that if the bank went out of business you might not get your money back.
With thanks to our partners over at the NMBA for content.
Up next week – BUDGETING!