Should I open a savings account?
In the first national lockdown, it was estimated that household spending decreased by almost a third. Some people lost their jobs (if you were one of them, read our guide to what to do if you have lost your job), some were put on furlough, and others simply no longer had leisure or travel plans to spend money on. This, combined with a financially uncertain future may have transformed many of us into a population of savers.
Before looking at savings accounts, you may first want to identify if you have any debts that could be paid off with your savings. This is because it's important to pay off existing debts before looking to save: the interest you would avoid paying on your debts could be greater than the interest you would receive by keeping the money in a savings account. So, what is a savings account, and what are some of the options?
Is it worth opening a savings account?
How much money is needed to open a savings account?
How do I open a savings account?
What happens to my money if the bank closes?
What are the alternatives to a savings account?
What is a savings account?
A savings account is an account into which you deposit money and with which you can earn interest on your deposit. A savings account is different from a bank account as you are not able to go overdrawn, and you can earn interest on your money. Most high street banks and some online banks offer savings facilities alongside a standard current account.
There are a variety of types of savings accounts available, some of these include:
ISAs
Individual Savings Accounts or ISAs can be used in the same way as other standard savings accounts, however, the difference with an ISA is that the maximum amount you can deposit over 12 months is £20,000. Interest rates on ISAs are variable so they can fluctuate but are often higher than standard savings accounts, especially if you lock your money into your ISA for a fixed period of time. These accounts could be better suited to a longer-term savings goal, although you can get an instant access ISA, which can have a lower interest rate.
Instant Access Savings
Just as the name implies, with an instant access account, you deposit your money into the account, and you can then access the money straight away, withdrawing it whenever you need to. The disadvantage of an instant access savings account is that the interest rate is not very high, and as you can withdraw from it quickly, you may find yourself dipping into it more often. This type of account would accommodate an emergency fund or short-term savings.
Fixed-Rate Saving Bonds
The interest payable on this type of account stays at a fixed rate for a fixed period of time, giving you an idea of how much you will earn from your savings over time. This can be an advantage as if the Bank of England base interest rate were to decrease during the duration of the fixed period, your interest rate would be protected, but it can also be a disadvantage as an account with a higher rate could be introduced and you wouldn't be able to transfer your money into it until your fixed term ended. This type of account could be the best fit for long-term savings goals, as long as you didn’t want to withdraw your money sooner.
Is it worth opening a savings account?
Despite the low rates, savings accounts can be worth using as it keeps your money away from your day to day transactions, ready for when you need it. If you are going to be saving long-term for something, then an ISA can be handy, but other alternatives may be more suitable.
How much money is needed to open a savings account?
Some savings accounts can be opened with as little as £1, however, some, like the Ford Fixed Saver 1 Year have a minimum initial deposit of £500, so it is always worth comparing to find the best option for your budget. If you can afford to, the ideal amount to save each month is 10-20% of your income. However, you can put as much, or as little as you like into your savings.
How do I open a savings account?
Opening a savings account is simple. Once you have compared the different accounts through this handy guide and found the right one for your needs, you need to gather some of your personal identification documents. If you are opening your savings account through your existing current account, then you may not need to provide too much, but it is always worth checking what the bank requires. Many savings account providers need to see a form of ID, such as a driving licence or passport, and proof of your current address. These can be scanned in when opening your account, or if it is safe to do so, taken into the branch. If you manage your bank online, you may also have the option to manage your savings account online, making it easy to deposit (and withdraw) when needed.
What happens to my money if the bank closes?
Before opening your account, it is important to check that the bank or building society is protected under the government's Financial Services Compensation Scheme (FSCS). This scheme covers you for up to £85,000 for a single account, and up to £170,000 for a joint account, so if the bank or building society were to close, you would get your money back up to those amounts. If you are planning to save more than £85,000, or £170,000 in a joint account you should consider the risks, an option might be to open savings accounts with other providers who are also covered by the FSCS.
What are the alternatives to a savings account?
There are alternatives to savings accounts that you could look at, depending on how you want to use your savings, whether it is a short-term investment, or you are saving for a longer-term goal.
Lifetime ISA
If your goal is to build up a house deposit as a first-time buyer, then a Lifetime ISA could be a suitable option. With a Lifetime ISA you can save a maximum of £4,000 a year, and when you are ready to withdraw the government will add a 25% bonus. This option can only be taken out if you are over 18, and under 40.
Investing
There are other ways of saving your money: you could choose to invest in stocks, shares, or property. However, this requires full research and understanding of the risks involved. You could also seek investment advice from a regulated independent financial adviser to explore whether these investments are a suitable option for you.
There are many different ways to keep your money safe and help it grow but the only person who can make the decision of where to put it is you. Make sure you thoroughly research the various available options, compare savings accounts and if you are still unsure it could be an helpful to speak to an advisor. Please remember that this article has been written to provide you with general information and the intention is not to make any specific investment recommendation or provide any financial advice. Some investments, including those mentioned in this article carry a measure of risk, and can result in a loss of money. You may get back less than you invest. Therefore, as previously mentioned, you may want to seek independent financial advice, particularly when decidingwhere and how to invest your money.