New to saving money and not sure which savings account to choose?
Most of us know that it’s a good idea to save money. But if you’re new to saving, it can be hard to know where to start.
There’s a variety of different savings accounts on the market and they all pay different rates of interest and work in slightly different ways. This guide aims to help you find the most suitable savings account for you.
How much should you save?
Experts recommend having at least three months’ worth of living expenses tucked away in a savings account. This gives you a financial buffer that could help you in an emergency. It could help to cover an unexpected bill or urgent repairs to your car or boiler, for instance. Read our top tips to kickstart your emergency savings fund.
Small Savers – How to get started?
Saving smaller, regular amounts is a good way to get started as it’s generally more manageable than saving larger sums every now and then. It can also help you to budget better.
It’s a good idea to go through your bank statements and work out how much money you have coming into your account each month, as well as how much you spend each month on bills and other expenses. If you don’t already have one, you can download a budget tracker for free here.
If you have a little money left over at the end of the month, it can be worth transferring this amount into a savings account. If you’re happy to commit to doing this every month, you can set up a standing order from your bank account to your savings account so the payment is made automatically. But if you’d prefer to save as and when you can, simply carry out a manual transfer as regularly as possible.
When it comes to picking a savings account, there are several options to consider…
Regular savings accounts
Regular savings accounts can be ideal if you’re just getting into the savings habit. As their name suggests, they’re designed to help you save regularly. Depending on the account, you’ll need to pay in somewhere between £25 and £400 a month, although some accounts don’t require you to do this every month.
Most regular savings accounts only last 12 months, after which point your money is often transferred to an easy access savings account. Some regular savings accounts let you withdraw cash if needed, while others will require you to leave your money untouched for the term of the account. Be sure to check before you apply.
Also check whether you will need to have a current account with the provider before you can open the regular savings account. First Direct, for example, offers a regular saver account paying 7.00% AER, and you can save between £25 and £300 a month. But you must have a First Direct current account to qualify.
Easy access savings accounts
Most easy access savings accounts let you access your money whenever you need to. That’s why they can be the best home for your emergency savings fund. Just watch out for accounts that limit withdrawals to two or three times a year in return for a higher interest rate.
Some easy access accounts can be opened with as little as £1, while others require a larger initial deposit. You can add to your savings as and when you’re able to.
Because these accounts are more flexible, interest rates on easy access accounts are often not quite as competitive – although you can currently find rates around 5%. Secure Trust Bank, for example, pays 5.00% AER on its easy access account and you can open it with just £1. Rates are variable so could change at any time.
Fixed rate bonds
If you’re lucky enough to have a lump sum to save, you could consider opening a fixed rate bond. These accounts often only let you pay in funds as soon as you’ve opened the account. You can’t usually add to your money at a later date, which is why they’re best for lump sums.
You’ll also need to be prepared to lock away that money for a set time. Accessing your money early can result in penalty fees, so you’ll need to be confident you won’t need that money for a while.
Fixed rate bonds can offer terms of between six months and five years. If you’re new to saving, you might prefer to stick to a shorter fixed rate bond for now.
For example, you can open a six-month bond with Atom Bank and this pays a rate of 5.00% AER. Or Investec offers a one-year fixed rate bond paying 5.30% AER. Interest rates are fixed so won’t change during the term of the account.
Notice accounts
Notice savings accounts sit somewhere between an easy access account and a fixed rate account. They allow you to access your money, but only if you give the required notice beforehand. This could be 30, 60, 90, 120 or even 180 days. Choosing a longer notice period usually means you’ll get a higher interest rate, but if you’d prefer not to plan that far ahead, a shorter notice period might be more suitable.
Cash ISAs
Cash ISAs are tax-free savings accounts. That means no tax is due on the interest you earn on your account. By contrast, with a standard savings account, you might have to pay tax on the interest you earn if you exceed your personal savings allowance.
The personal savings allowance means that basic rate taxpayers can earn up to £1,000 in interest each tax year across all their bank accounts and savings accounts without paying tax on it. Higher rate taxpayers can earn up to £500.
However, any interest you earn on money held in a cash ISA won’t count towards your personal savings allowance and no tax will be due. You can pay up to £20,000 into a cash ISA for the 2023/24 tax year. Your allowance resets in the new tax year.
You’ll be able to choose from both easy access and fixed rate cash ISA accounts.
Lifetime ISAs
It’s worth mentioning lifetime ISAs here too. These are available to anyone between the ages of 18 and 39. You can pay in up to £4,000 a year towards either a first home or your retirement. The government then adds a 25% bonus to what you save, up to a maximum of £1,000 a year. Again, these accounts are tax-free.
You can only withdraw money from a lifetime ISA in the following circumstances:
- You’re buying your first home (costing £450,000 or less)
- You’re aged 60 or over
- You’re terminally ill, with less than 12 months to live.
If you withdraw money for another reason, you’ll pay a 25% withdrawal charge.
Rates and accounts correct at time of publishing.
This information is intended for editorial purposes only and not intended as a recommendation or financial advice