Putting some money away regularly is the best way of saving up for expensive things, like a holiday, household items, or to help spread the cost of school or university fees.
There are two ways to save money - short term and long term. Savings accounts are for times when you may need to access your money quickly. They are different from investments, which are designed to be for the longer term.
Regular savings, however small the amount set aside is, will add up. The earlier you start saving, the more money you will have to help you achieve your financial goals.
Saving tends to be for short-term goals or when you may need to get at your money quickly (for example a holiday, Christmas, or an emergency such as replacing a significant household item, such as a boiler). A typical way to save is by putting your money into a savings account where it earns interest, without the risk of losing it (short of a bank or building society getting into serious financial difficulty).
Investing is for the longer term. If you are willing to tie up your money and take some risk with it, you may be able to get a better return on your money than you might from a savings account.
Saving for the short term
There are many different types of savings accounts available and you do not have to save money with the bank that holds your current account. With savings accounts, you can usually get your money out immediately or after a certain notice period, such as 30, 60 or 90 days.
Different bank savings accounts will offer different interest rates and notice periods for withdrawing your money without penalty. There are also other options, for example you may wish to use a National Savings and Investments account issued by the UK government.
Investing for the longer term
Saving for retirement is one of the biggest investments that most people make. The most common way to save for retirement is in a pension, where you get tax relief on the money you pay into it - seethe section of this website relating to Pensions.
You may want to invest money for a long-term goal, such as your children's university fees.
Investing means tying up your money for a period of time in products that are often linked to the performance of the stock market. The value of an investment can go down as well as up. By investing your money, you take certain risks to increase your chances of getting higher returns on your money, especially over the longer term (money you can afford to tie up for five years or more).
How your savings grow
Money is deposited into an account where it earns interest, either monthly or yearly, which will enable your money to grow. Interest added on top of that interest is called compound interest.
Savings in this way can be a slow process and it can take many years for your original deposit to grow by very much. To help your money grow it is very important to save regularly and not to dip into it, if you can help it.
Be aware of the impact that inflation can have on the value of your savings. Inflation happens when prices rise throughout an economy. The effect of inflation on your money means that the money you save will buy you less each year.
TYPES OF SAVINGS PRODUCTS
There are many different ways to save money, each with different features, benefits and protection.
This section will tell you about different types of savings accounts and products and how they work. The most common types of saving products are bank and building society savings accounts and National Savings and Investments products.
Banks and building societies must be regulated by a financial services regulatory authority to be able to take your money and hold it.
Savings accounts generally pay higher interest rates than current accounts. You can find them at banks, building societies and through National Savings and Investments. They are suitable for short to medium term savings.
Savings accounts are deposit-based. This means you will usually get back the money you have put into the account plus interest, unless the bank or building society collapses.
You can ask your bank to arrange for a set amount of money to be paid regularly from your current account into a savings account - this method is usually called a standing order.
Is it right for you?
If you are saving for the short to medium-term, less than five years, or you want a low risk home for your savings, consider savings accounts.
Here are some things to consider when you are choosing a savings account:
- Do you want a fixed interest rate or are you happy for it to vary?
- Do you want the interest paid monthly or annually?
- Are you able to manage your account online or by phone? If so, you may get a better interest rate.
- Should you get an account with a passbook? Some people like having the certainty a passbook offers, but accounts with passbooks may have lower interest rates than other types of savings accounts.
Whatever you decide, make sure that you shop around to find the best savings product for you and review your decision regularly, especially when interest rates change.
Running a savings account
Don't just put your money away and then forget about your savings account - interest rates can change fairly frequently.
It is a good idea to check regularly that you are still getting a good return on your savings. If you are not, consider switching to a new account - but do watch out for any penalties or loss of interest that may occur on withdrawing money from the original account.
Your bank or building society must tell you if the interest rate on your account changes. They also have to give you the right to switch accounts for free if the interest rate changes significantly.