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Its-YOUR-money looks at Saving

On the money-sense page we refer to savings being liquid: we can get our hands on the cash pretty easily. Investments on the other hand are usually less easy to turn into cash. Some of the products that people refer to as ‘savings’, for example National Savings Certificates or building society bonds, PEPs and ISAs, are not as liquid as a savings account in a bank or building society and for that reason we will treat them as fixed interest investments rather than savings. On this page we are talking mainly about savings accounts.

Why save?

There are several reasons why it is sensible to have a certain amount of money we can get hold of at short notice. Although we can spread a lot of our day to day spending so that it broadly matches whatever regular income we have, there are times when we have spare cash and times when we are short. Some of these peaks and troughs are predictable, but there is always the possibility of needing to spend money unexpectedly. Even if we have enough saved for almost any eventuality and we can think about investing for the longer term, there may be good reasons why we don’t want to invest right now.

Savings, then, provide a buffer against mismatches between cash coming in and cash going out; they are our umbrella for the unexpected rainy day; and they are a temporary home for cash that we plan to invest in the future, or between cashing in one investment and putting the money into another one.

Which savings accounts?

As well as the obvious approach of choosing the account with the highest rate of interest, there are other things to consider. Most banks now offer interest-bearing current accounts although the rates are not usually as good as dedicated savings accounts. However they can be worth considering if your income isn't as regular as, say, a monthly salary. Some banks will let you operate a current account alongside a savings account, into which they will transfer any spare cash each day.

Generally though you will get the best rates in a dedicated savings account that you manage via the internet, because that reduces the bank’s administration costs. It’s convenient for you too because you can do your banking when it suits you. Transfers into an online account are made either by direct debit or BACS electronic transfer from your normal current account. Transfers out are normally made via BACS. The thing to consider is that BACS can take up to 4 working days before the cash appears in the account it is sent to. Some savings accounts will allow you to use a same-day electronic transfer, but there will be a charge of £25 to £30.

Things to watch out for

Banks and building societies bring out new savings accounts regularly and tempt you by offering an attractive introductory interest rate. After this honeymoon period, the rates may well be less competitive. You are faced with either being a ‘rate tart’ and changing accounts regularly to take advantage of whatever today’s special offer happens to be, or risk losing out. You also need to be aware that some accounts may restrict the number of withdrawals you can make in any month, and some may put a limit on the amount of any single withdrawal (especially from online accounts).

Keep a watch on how the rates that apply to your accounts compare to the best buys regularly published in newspapers and online money pages. Banks exploit the fact that many customers don’t shop around as often as they should. When they introduce new accounts with headline-grabbing rates, the old accounts get less and less competitive. It’s a bind having to change, and the banks and building societies that are guilty of this behaviour (and most of them are) arguably deserve to get some stick for it. However, there are banks that promise to maintain competitive rates and they are worth considering. It is not our policy to recommend specific providers of financial services, but they are not hard to find and our links to other money pages should help.

How safe are savings accounts?

UK banks and building societies are regulated by the Financial Services Authority (FSA), and have to operate in accordance with appropriate legislation. Banking failures are extremely rare. However, banks based overseas are outside the jurisdiction of the FSA and depositors are not covered by the Financial Services Compensation Scheme (although there may well be similar protection in the countries concerned).

The Financial Services Compensation Scheme (FSCS) was established under the Financial Services and Markets Act 2000. Payments under the Scheme are limited to 100% of the first £2,000 of a depositor's total deposits with the bank and 90% of the next £33,000, resulting in a maximum payment of £31,700. Most depositors, including individuals and small firms are covered.

How much should I be saving?

The short answer is: as much as possible! But really there isn't any simple answer. It depends on your individual circumstances, including age, income now, prospective income, family situation, and life-style. This is discussed in more detail in the sections: looking ahead, your future (pensions), and asset allocation. All we can say here is that there is a crisis looming for very many people as they approach retirement, and that represents a serious and increasing problem for government. Experience and common sense both suggest that the safest course is to be as self-sufficient as possible. This is why it is so important for people in all walks of life to be financially literate and that in turn is the motivation behind this site.

However, as well as having a savings safety belt in case of unexpected problems, it is sensible to consider how insurance can help. That is the subject of our next page.

 

  9 October, 2008 © 2008 K.R.Wade and Co Ltd prev page next page