How To Get The Most Out Of Your Savings Account

What’s the difference between a current account and a savings account?

While pretty much everyone needs a current account – an account that’s set up at a bank from which money can be withdrawn without notice – having a separate savings account is more about helping you to save rather than necessarily getting you a better interest rate. Though savings account interest rates have started to inch up, many still are pretty meagre options for savers.

If you want to access your savings at any time, you can do so with both a savings account and a current account. Other features of a current account include overdraft facilities and the ability to set up direct debits and standing orders. You can’t do this with savings accounts.

So, do we actually need a savings account?

Opening a savings account is usually best for setting aside money for a specific purpose, such as a holiday or a new kitchen. They also have marginally better interest rates than current accounts and a sensible option if you need to be more disciplined with your cash and prevent yourself from overspending – savings accounts charge a penalty for early withdrawal.

And do we need a savings account with a bonus and one without?

Bonus rates are used by banks to entice new customers. These bonuses can be great for many people – just don’t forget that the boost will end. There’s not much point going for an eye-catching 5% account if it lasts for three months and then you’re put back on 1%.

Tell us about notice and easy access savings accounts? What makes them different?

Notice accounts sit between easy access and fixed-term accounts. All of them do exactly what they say on the tin. Easy access accounts allow easy access, letting you withdraw your money at any time, which is good if you need flexibility, but generally means lower interest rates. If you don’t want to lock your cash up for years and don’t need access to it instantly, notice accounts would be your best choice. This simply means you need to give the bank a heads-up before you can withdraw money; this is typically between 30- and 90-days’ notice. As a general rule, the more notice you can give, the better rate you’ll get.
 
Finally, having a fixed-rate account means you agree a rate but have to lock your cash up with the bank – or else pay a penalty. These accounts usually offer the best rates, but not great if you need flexibility. Also, if interest rates rose while your cash is locked in, you might be stuck while other accounts start to offer better rates.

Do any accounts give you a better rate?

Inflation is currently at 2.4%. To beat that, you’ll have to look at locking your money away for a fixed term of at least three years. Fixed-rate accounts are savings accounts which guarantee an interest rate for a fixed period. However, the downside is that if an account with a better rate comes along, you won’t be able to switch over, as you’ll be penalised for withdrawing your cash early.

It may sound silly but can you explain interest to us in simple terms?

If you’re borrowing, interest is the amount you’re charged to borrow - typically expressed as an annual percentage. This will need to be repaid, along with the original amount borrowed. If you’re saving, interest is the amount you’ll make on your savings - also typically expressed as an annual percentage. Borrowing: using a basic example, if you wanted to borrow £1,000 at 5% for 12 months that would cost you £50 (5% of £1,000).
 
The process is the same when you’re saving. When you are saving with a bank, you’re effectively lending the bank money. Savings interest rates are what the bank pays you for borrowing your money. Saving: using another simple example, if you saved £1,000 at 2.5% for six months, you’d get roughly £12.50 in savings interest (2.5% of £1,000 is £25, then half that as it’s for six months).

And finally, what about building societies – do they offer better savings accounts?

Banks are companies listed on the stock exchange, while building societies traditionally have no external shareholders. Instead, building societies have ‘members’ who vote on decisions which affect the society and its resources. When you have an account with a building society, you become a member.

In terms of service and security, there is little to choose between banks and building societies. As long as the institution you choose is covered by the Financial Services Compensation Scheme (FSCS) then your money will be protected by the UK government, up to the value of £85,000 if the institution goes bust (which is rare).
 
Find out more at Finder.com