Savings: Making Your Spare Cash Work For You
With interest rates at an all time low in the UK, and some countries like Switzerland even having negative rates, it’s often hard to find a good high-yield savings account on the market. Most banks have slashed their rates down to around 0.1%, and saving has become much less lucrative than just over a decade ago. *As of July 2020.
In this article, we will give an overview of the current savings market, and give you some hints & tips, so you can hopefully go away and start making a little bit more in that sweet, sweet interest.
To begin with, it’s important to understand your own financial situation. Ask yourself these questions;
- Do you have enough money put away in an emergency fund where you can lock away savings?
- Will you need access to this money if an emergency happened?
If you’re in a good financial place, and you can lock your money away for some time, then you can consider putting your money into a 1-5+ year fixed account. Right now, this definitely has some advantages. On some 1 year fixes such as: Atom Bank*, have interest rates of 1.3%. Now we understand this isn’t great. But as previously mentioned, this is good as it gets. With the Bank of England discussing negative interest rates, at least with a fixed term account your interest rate cannot go any lower than 1.3%.*As of June 2020.
However, a concern would be locking your money away for too long. Some longer fixes such as 3-5 years have higher fixed rates, but they’re lower than the Bank of England’s inflation target of 2%. If inflation spikes during the crisis, you’re now losing money whilst it’s tied in for a long time to come.
The key to fixed-terming your savings is only put money away you can afford to live without. Obviously, if you’re going to need the money in a few months time, or don’t have any emergency savings, then be mindful of tying your money away. You don’t want to be putting yourself in a situation where potentially you could be having to borrow at a much higher interest rate than what you’re earning through savings.
On the other side of the scale you can get easy access cash ISAs, where you earn a lower interest rate but can withdraw your money whenever is best for you. This gives savers a lot more flexibility in what they can do with their money, however the interest rate is significantly lower around 0.7-0.9%. Something else to be mindful of, is that you want a cash ISA which allows you to make unlimited withdrawals *and* also allows you to continuously add more cash into your savings.
The big benefit of cash ISAs is that you can have that money anytime that you do need it. Especially with interest rates at such a low scale, sometimes it’s minimal between what you earn in fixed terms, and what you can earn through a cash ISA.
Additionally, a cash ISA can be used as earning interest on your emergency fund. An emergency fund should be roughly, at least, 3-6 months of your salary, so if you could not work for a period of time due to, say, illness or losing your job -you’re covered for that time.
Regular Savings Accounts
You can also set up savings accounts with your current account providers. These tend to have the best interest rate, with some paying a whopping 2.75% fixed for a year. However, do be mindful that usually you can only put away a low amount into a savings account. Most are around £2,500 – £3,000 per year which isn’t really that much to earn interest on.
Furthermore, as we spoke about previously, this does tie your money in for a fixed year period, so just make sure you can do without that money. Although you can actually close your savings account if you want access to your money, but you will lose the interest on your account and sometimes have to pay a penalty – so be mindful of this.
One of the most popular savings accounts on the market is the “XX day notice accounts.” This is where you can get your money back within a set period of time, as an example – 90 days notice. These accounts give you a decent interest rate, currently around 1-1.1%* which isn’t too bad considering the low interest rates on most savings accounts. *As of June 2020.
A benefit of a notice account is, of course, you have a lot more flexibility than you do with a 1 year fixed etc. Being able to have access to your money in 90 days is a lot nicer than having to wait a year for it. Plus, with interest rates on the accounts being reasonable, you can see why it’s one of the most popular accounts to open right now.
The key thing about savings is making sure you pick the right savings account for your own financial needs/situation. If you can afford to have savings fixed, then pick the highest interest rate you can find on the market.
Maybe a mix of savings accounts is the best for you. Maxing out the regular savings accounts at a higher interest rate, having some money in a notice period account and having your emergency fund in a cash ISA earning interest could be one way to mix and match your savings.